tag:blogger.com,1999:blog-343236872024-03-19T03:05:57.994+00:00Macro ManMacro Manhttp://www.blogger.com/profile/12324967552369915949noreply@blogger.comBlogger22911100tag:blogger.com,1999:blog-34323687.post-47116383733695778642019-09-29T15:21:00.002+01:002019-09-29T15:22:06.345+01:00What Can Field of Dreams Teach Us About Corn And Trading Macro?<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">Last night I wasted Field of Dreams with the kids. Plenty of complaints before the start. One wanted to watch Avengers, another didn’t want to watch a sports movie. The other one was opposed to the entire endeavor. </span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">They came around pretty quick. But here was my big takeaway: I’m on the verge of becoming a naturalized citizen in the commodity world--I couldn’t stop thinking about how all the farmers were appalled and outraged when Kevin Costner dug up his corn to build the baseball field. And then there was the clearly disastrous financial implications, where this decision put his farm on the verge of bankruptcy. </span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">I had questions. 1) how much corn did he dig up? 2) how much revenue did he forego, in absolute terms and relative to the size of the farm? 3) Given a few assumptions, was this really a farm-wrecking decision, or was this Hollywood stuff? </span></div>
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<a href="http://usda.mannlib.cornell.edu/usda/AgCensusImages/1987/01/15/3/Table-51.pdf" style="text-decoration-line: none;"><span style="color: #1155cc; font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">In 1987 many farms in Iowa were between 250-500 acres</span></a><span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">, and this same data shows a husband/wife team could have eked out a living managing such farm. Let's assume this was a 250 acre farm.</span></div>
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<a href="https://www.card.iastate.edu/farmland/downloads/" style="text-decoration-line: none;"><span style="color: #1155cc; font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">The average value per acre in Iowa was $875 in 1987</span></a><span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">, around the depth of the US farm crisis. A 250-acre farm could have been had for around $220,000. Lets call it $280k with a modest farm house on the property. Putting say, $60k down on such a property was certainly within reach for a college educated, dual income couple in their mid-30s that has been working and saving for 10-15 years.</span></div>
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<a href="https://www.extension.iastate.edu/agdm/crops/pdf/a2-11.pdf" style="text-decoration-line: none;"><span style="color: #1155cc; font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">The average farm price for corn in 1987 was $1.89/bushel</span></a><span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">. And one might expect an acre of corn to yield </span><a href="https://www.cropprophet.com/historical-state-grain-yields/" style="text-decoration-line: none;"><span style="color: #1155cc; font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">around 120 bushels of corn. </span></a><span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;"> </span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;"><span style="border: none; display: inline-block; height: 350px; overflow: hidden; width: 467px;"><img height="350" src="https://lh3.googleusercontent.com/--hbunG1i5OOUb0nzBpMGJGtxXOPBfVvZTVyLGtDrZsFs1_pcEgT3T6YJvzagtlEhelH6W6DXV6laLuYJhUOd8UBXap3HqE9EaKL5gY8kgtno8SnJ9O1y7aMM5Baqw4t_7-8TxVS" style="margin-left: 0px; margin-top: 0px;" width="467" /></span></span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">So 250 acres of corn, yielding 120 bushels nets you 30,000 bushels of corn. Lets say Kevin Costner is a particularly crafty basis trader and he gets $2/bushel for his corn. He grosses $60,000. The 1987 census report above suggests such a farm might generate $20-$30k in net income--enough to live on if you’re into the lifestyle--but there were many farms during that time that were losing money. </span><a href="https://www.cropprophet.com/historical-state-grain-yields/" style="text-decoration-line: none;"><span style="color: #1155cc; font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">Bankruptcy was certainly on the mind of every US farmer</span></a><span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;"> in the mid-late 80s. </span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">Now, what about this baseball field? </span><a href="https://www.businessinsider.com/chart-major-league-baseball-ballpark-sizes-2014-3" style="text-decoration-line: none;"><span style="color: #1155cc; font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">A major league baseball field is around 2.5 acres.</span></a><span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;"> </span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;"><span style="border: none; display: inline-block; height: 361px; overflow: hidden; width: 455px;"><img height="361" src="https://lh4.googleusercontent.com/cQeCtydWzhEED-G8iTK_hHKohNhhEw1WJwlq4GXYZxOOk_jg_egm7ZGXGZFH30W2HqTvdsC7_LB8mE6TqXn1LWd7VgthhanmmRZlCMAfUrRG_OdxD95L6rL2VY5lXtE692WgKGwJ" style="margin-left: 0px; margin-top: 0px;" width="455" /></span></span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">But with foul territory and some residual space for bleachers, you’re probably looking at another acre. But </span><a href="https://ballfields.com/baseball-field-dimensions/space-needs-of-a-ballfield/" style="text-decoration-line: none;"><span style="color: #1155cc; font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">no more than 4.5 acres total, even if you add in a few parking spaces. </span></a></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">Let's say Kevin Costner dug up four acres of corn. That’s less than $1000 in foregone revenue in the year he dug it up (it probably had some residual silage value!) and in the new crop year when Shoeless Joe finally showed up. </span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">So our hero gave up $1000 out of $60,000 in revenue, and maybe $30,000 in net income. Let’s add on another $1000 for the infield dirt, the grass he planted, and the backstop fence. Despite the gossiping and murmuring of the other farmers and their wives, he certainly could have billed it as a community service--and heck, even written it off on his taxes--since presumably he didn’t just let the field sit there..he let the local farm-kid teams play on it while he was waiting for whatever was supposed to happen. </span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">An aggressive financial decision, but one easily justified by hearing a voice say, </span><a href="https://www.youtube.com/watch?v=NOPTByHw5RA" style="text-decoration-line: none;"><span style="color: #1155cc; font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">“If you build it, he will come.”</span></a><span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;"> </span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">Kevin Costner made one crazy, totally unjustifiable decision: he lit the field!! </span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;"><span style="border: none; display: inline-block; height: 168px; overflow: hidden; width: 299px;"><img height="168" src="https://lh3.googleusercontent.com/nvsn5nDxtVy6Lb-LZ5VN4ddzLGLnwyDUewHe6snVXVtBHimn347F3_7gENKTpcHKKR0YngDDca-cBZKW9b4ERDvveca0NiDrR2LVA7GYquAyewOcvyaAVWEZY0qRUctvgpBvr5XQ" style="margin-left: 0px; margin-top: 0px;" width="299" /></span></span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">This, is what would have bankrupted his farm. This is the decision that would have had his smarmy brother-in-law questioning his sanity. </span><a href="https://www.razorlux.com/how-much-do-baseball-field-lights-cost.html" style="text-decoration-line: none;"><span style="color: #1155cc; font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">Lighting the field today would easily get you into six digits</span></a><span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">, and would certainly have been out of reach for a financially strapped family farmer in the midst of an agricultural crisis.</span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">Sure, it made for the coolest scene in the movie. </span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;"><span style="border: none; display: inline-block; height: 326px; overflow: hidden; width: 580px;"><img height="224" src="https://lh6.googleusercontent.com/7BM358rqvv5CGMYfipWtZipQ6nU8sZairsHVc24PDfIcI970H8JUKPJD2EGKg96QUxMQluWYt72tgeW8HfNRPQzvpGKCPHtzVQq0WfkOEPZU_xUjHqVoi9fThCwt0E9EcbMXse5Y" style="margin-left: 0px; margin-top: 0px;" width="400" /></span></span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">But completely implausible. </span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">Here’s a few light-hearted takeaways for market analysis: </span></div>
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<span style="font-family: "arial"; font-size: 11pt; font-weight: 700; vertical-align: baseline; white-space: pre-wrap;">Question assumptions.</span><span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;"> We all have a cognitive bias to buy into what we’re being told. It’s called </span><a href="https://en.wikipedia.org/wiki/Truth-default_theory" style="font-family: Arial; font-size: 11pt; text-decoration-line: none; white-space: pre;"><span style="color: #1155cc; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">“Truth Default Theory”</span></a><span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">. It’s what makes movies work….but it often turns into a trap in markets. </span></div>
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<span style="font-family: "arial"; font-size: 11pt; font-weight: 700; vertical-align: baseline; white-space: pre-wrap;">Sometimes the trade is not where you think. </span><span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">Everyone jumped on Kevin Costner for digging up his corn--but it was the lights that were financially reckless. </span></div>
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<span style="font-family: "arial"; font-size: 11pt; font-weight: 700; vertical-align: baseline; white-space: pre-wrap;">Everyone loves a story.</span><span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;"> Many trades are long on “story” because stories sell. You’re not going to get your boss to buy into upsizing your trade because of your spreadsheet. You need a story.</span></div>
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<span style="font-family: "arial"; font-size: 11pt; font-weight: 700; vertical-align: baseline; white-space: pre-wrap;">But….every story needs data. </span><span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">Stories without data are just that, Hollywood stories. A good story combined with solid data can go a long way. </span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">But most important:</span></div>
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<span style="font-family: "arial"; font-size: 11pt; font-weight: 700; vertical-align: baseline; white-space: pre-wrap;">Be open to changing your mind. </span><span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">I didn’t mention this above, but the key point of the movie is when the fussy pants brother-in-law has his epiphany. This was a man that was deep into his own trade to buy Kevin’s farm. But he changed his mind. That this was done only with divine intervention is irrelevant! Too often we get wedded to ideas and refuse to accept the metal cost of accepting that we were wrong and changing course. </span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">Love your ideas, but don’t be afraid to set them free. </span></div>
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<span style="font-family: "arial";"><span style="font-size: 14.6667px; white-space: pre-wrap;"><a href="https://twitter.com/EMinflationista" target="_blank">@EMInflationista</a></span></span></div>
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EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com702tag:blogger.com,1999:blog-34323687.post-206258340457541742019-09-03T05:18:00.000+01:002019-09-03T12:46:12.464+01:00Curve Flattening and Monetary Policy Effectiveness: Is It Different This Time? <div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="border: none; display: inline-block; height: 288px; overflow: hidden; width: 512px;"><span style="font-family: "georgia" , "times new roman" , serif;"><img height="288" src="https://lh5.googleusercontent.com/2eC4dXG_gKCkKmtSROiPu_LBfAs6ZUtjDD1LkQuy650s39o8a6Mbrbca-SYMmUAHQezTpCanqyZn5fMcCZydThdhWdkANufUuiC4Ls0dRxYSoi-BoU48ijfQV9Orkwp-NgGUOd90" style="margin-left: 0px; margin-top: 0px;" width="512" /></span></span></span></div>
<b id="docs-internal-guid-105a2850-7fff-8d90-2378-61c773f128af" style="font-weight: normal;"><span style="font-family: "georgia" , "times new roman" , serif;"><br /></span></b>
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<span style="background-color: transparent; color: black; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-family: "georgia" , "times new roman" , serif;">No doubt you’ve read something about the flattening of the yield curve. You may have even heard it inverted. I can always tell when an arcane financial concepts hit the mainstream by when my relatives ask me about it. I’ve gotten that one a few times lately. </span></span></div>
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<span style="background-color: transparent; color: black; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-family: "georgia" , "times new roman" , serif;">But let's take that question at face value. Let’s put aside curve inversion for a moment. What does a *flattening* yield curve mean for monetary policy and the economy? </span></span></div>
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<span style="background-color: transparent; color: black; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-family: "georgia" , "times new roman" , serif;">Mohamed got me thinking about that question this afternoon: </span></span></div>
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<span style="background-color: transparent; color: black; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="border: none; display: inline-block; height: 279px; overflow: hidden; width: 376px;"><span style="font-family: "georgia" , "times new roman" , serif;"><img height="279" src="https://lh6.googleusercontent.com/pSO8bfO33aeTo6j9LyAbk09uSpOM4MWEW3lVTrpAKKW3jJbdSyNMTYZhO4KyRsCZzWk12sF6YJCjTsEonispwDyKH98eWg1isaLUqov128ap39jfhAPJ6Jq-DHzolbzF7VqHY3SU" style="margin-left: 0px; margin-top: 0px;" width="376" /></span></span></span></div>
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<span style="background-color: transparent; color: black; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-family: "georgia" , "times new roman" , serif;">The biggest story in financial markets over the past year is not the inversion of the US yield curve, but the bull flattening of the bund curve: here is a chart of Germany 5y/30y slope vs. assets on the ECB balance sheet: </span></span></div>
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<span style="background-color: transparent; color: black; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="border: none; display: inline-block; height: 249px; overflow: hidden; width: 624px;"><span style="font-family: "georgia" , "times new roman" , serif;"><img height="249" src="https://lh3.googleusercontent.com/npqeUBbp7Dwiy-b_XQF64Qez0C4qz0woGFxmzfuxuUPUJu0OftiD1UV37KCrYR1Cf1uqRUQcGEmW_khQHsGil0moNEHwd2j05IjUq6wMimENFUUF4gEiGVUNlSeFcMlrU3A9r5oz" style="margin-left: 0px; margin-top: 0px;" width="624" /></span></span></span></div>
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<span style="background-color: transparent; color: black; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-family: "georgia" , "times new roman" , serif;">The end of the ECB’s asset purchase program coincided quite closely with a slowdown in global growth that resulted in the bull flattening of the 5y/30y bund curve. What does that mean? Slowing growth--but also little optimism for a pickup in growth or inflation in the future. Combine that with the factors Mohamed mentioned and you have the recipe for a very big bull flattening. </span></span></div>
<b style="font-weight: normal;"><span style="font-family: "georgia" , "times new roman" , serif;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-family: "georgia" , "times new roman" , serif;">Fast forward to the next ECB meeting. How should monetary policy react? Traditionally, as growth slows monetary policy eases, either through rate cuts, or more recently, asset purchases. You can see that clearly in the chart above in 2015 and heck, right through to 2017. </span></span></div>
<b style="font-weight: normal;"><span style="font-family: "georgia" , "times new roman" , serif;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-family: "georgia" , "times new roman" , serif;">The flattening in 2014 and again in 2016 both reversed out quite nicely--the first time the result of increased QE from the ECB, and the second time after global growth recovered from the nadir of China growth fears and low oil prices in early 2016. </span></span></div>
<b style="font-weight: normal;"><span style="font-family: "georgia" , "times new roman" , serif;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-family: "georgia" , "times new roman" , serif;">Where does that leave the ECB today? In a heap of trouble. They need to steepen the curve. </span></span></div>
<b style="font-weight: normal;"><span style="font-family: "georgia" , "times new roman" , serif;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-family: "georgia" , "times new roman" , serif;">Among the myriad problems in Europe are their banks. The flat curves, low growth, and regulatory constraints have strangled big European banks. Look at this chart of return on equity in European banks vs. US banks: </span></span></div>
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<span style="background-color: transparent; color: black; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="border: none; display: inline-block; height: 293px; overflow: hidden; width: 475px;"><span style="font-family: "georgia" , "times new roman" , serif;"><img height="293" src="https://lh6.googleusercontent.com/agTcrKr8v_C0Z15dtKKlJefj37vQ8DiWg4AOqEMsIVcmQYqCasjoYukxSkgUa9P7xN7T6GWZRXNjy78TmDA2-_9EzUujHg1jpp_CN487uTl7G9W3IhCfUq3j8s1sGOSIiX9FIiCc" style="margin-left: 0px; margin-top: 0px;" title="Chart" width="475" /></span></span></span></div>
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<span style="background-color: transparent; color: black; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-family: "georgia" , "times new roman" , serif;">Sources: Bloomberg, Federal Reserve Bank of St. Louis (FRED)</span></span></div>
<b style="font-weight: normal;"><span style="font-family: "georgia" , "times new roman" , serif;"><br /></span></b>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-family: "georgia" , "times new roman" , serif;">A flat curve means that banks can’t borrow low (from depositors) and lend high (to borrowers). They have to rely on credit spreads or simply do nothing at all and make money off fees. When banks can’t make money on lending, credit growth suffers. A similar chart of US vs. European credit growth would show a similar dissonance between the US and Europe. </span></span></div>
<b style="font-weight: normal;"><span style="font-family: "georgia" , "times new roman" , serif;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-family: "georgia" , "times new roman" , serif;">The ECB must find a way to steepen yield curves. How can they do it? Easing monetary policy *must* be a signal for higher growth and inflation, otherwise it is ineffective and most likely counterproductive. If the ECB believes further easing won’t steepen yield curves, they should say so explicitly and tell the government this is their problem now. </span></span></div>
<b style="font-weight: normal;"><span style="font-family: "georgia" , "times new roman" , serif;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-family: "georgia" , "times new roman" , serif;">That would lead to an easing of fiscal policy--via issuing more long end bonds. That would give Mohamed the supply he so desperately wants for his friends at Allianz. </span></span></div>
<b style="font-weight: normal;"><span style="font-family: "georgia" , "times new roman" , serif;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-family: "georgia" , "times new roman" , serif;">Now, let's contrast the situation in Europe with what we see in the US: </span></span></div>
<b style="font-weight: normal;"><span style="font-family: "georgia" , "times new roman" , serif;"><br /><br /><br /><br /><br /></span></b><br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-family: "georgia" , "times new roman" , serif;">By way of example, look what happened back in 2007: when the Fed started cutting rates, the 5/30y UST spread started to steepen--as one would expect if monetary stimulus coinciding with the end of the business cycle leads to higher growth in the future (the vertical line coincides with the first cut from the Fed). </span></span></div>
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<span style="background-color: transparent; color: black; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="border: none; display: inline-block; height: 360px; overflow: hidden; width: 624px;"><span style="font-family: "georgia" , "times new roman" , serif;"><img height="360" src="https://lh6.googleusercontent.com/xZB-JahbiNtyGB1k6qrHTfhgJS-NHdavk1mI81lL1GWFKyfrzIV3S5SsjN3DaeBQdXOtHuGUhTxZIXZT_pB020Dky39kJrWl0GbqPNBZ87nsd633_eU4foIM5jGcLOeVX6asvAX8" style="margin-left: 0px; margin-top: 0px;" width="624" /></span></span></span></div>
<b style="font-weight: normal;"><span style="font-family: "georgia" , "times new roman" , serif;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-family: "georgia" , "times new roman" , serif;">Throughout 2008, the curve stayed steep...going over 200bps in mid 2009. The first round of QE </span></span></div>
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<span style="background-color: transparent; color: black; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-family: "georgia" , "times new roman" , serif;">Steepened the curve even more: 5y/30y spread topped out at over 250bps in 2010. </span></span></div>
<b style="font-weight: normal;"><span style="font-family: "georgia" , "times new roman" , serif;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-family: "georgia" , "times new roman" , serif;">That was very supportive for credit growth--which is one of monetary policy’s core transmission mechanisms. </span></span></div>
<b style="font-weight: normal;"><span style="font-family: "georgia" , "times new roman" , serif;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-family: "georgia" , "times new roman" , serif;">Now, looking at the situation today: here is the same chart, 5y/30y ust spread and the fed funds rate.</span></span></div>
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<span style="background-color: transparent; color: black; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="border: none; display: inline-block; height: 360px; overflow: hidden; width: 624px;"><span style="font-family: "georgia" , "times new roman" , serif;"><img height="360" src="https://lh6.googleusercontent.com/WtcLfKkhBINa4qNYKLPs6cLPzb5jWoWTo9OCK31tm2uCt2xTb0f_mD4e3AXyG313KUBIXw3_v13TtQiaGLyEDeFBvbe24oliJppz-jqDM5NZAlR5TVvwakFCgWxEVzKA5Rx5hRdo" style="margin-left: 0px; margin-top: 0px;" width="624" /></span></span></span></div>
<b style="font-weight: normal;"><span style="font-family: "georgia" , "times new roman" , serif;"><br /></span></b>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-family: "georgia" , "times new roman" , serif;">This time, the curve FLATTENED when the Fed started cutting rates. </span></span></div>
<b style="font-weight: normal;"><span style="font-family: "georgia" , "times new roman" , serif;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-family: "georgia" , "times new roman" , serif;">The market is telling the fed and the ECB that they don’t believe the traditional monetary policy transmission mechanisms work anymore. </span></span></div>
<b style="font-weight: normal;"><span style="font-family: "georgia" , "times new roman" , serif;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-family: "georgia" , "times new roman" , serif;">Do you believe the market has that right? The market opportunity is clear---bet on further flattening and stagnation if monetary policy is broken--bet on steepening if you think a combination of normal business cycle re-ignition and Fed and ECB easing can sort this out and return growth to trend. </span></span></div>
<b style="font-weight: normal;"><span style="font-family: "georgia" , "times new roman" , serif;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-family: "georgia" , "times new roman" , serif;">My take: I think the market has gotten way out ahead of itself and is trading on 1) fear and 2) momentum. Real money guys benchmarked to indexes--who happen to be getting eaten alive by passive indexation--caught on to the rally in the front end, but have reacted by buying long end duration and convexity. They are going to stay long until proven otherwise. Nobody wants to be left behind in the great bond rally of 2019. </span></span></div>
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<br /></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-family: "georgia" , "times new roman" , serif;"><span style="background-color: transparent; color: black; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Now, put on your behavioral finance hat. If you have skin in the game, ask yourself or your colleagues these types of questions: </span><span style="background-color: transparent; color: black; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span></span></div>
<ul style="margin-bottom: 0; margin-top: 0;">
<li dir="ltr" style="background-color: transparent; color: black; font-style: normal; font-variant: normal; font-weight: 400; list-style-type: disc; text-decoration: none; vertical-align: baseline; white-space: pre;"><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-family: "georgia" , "times new roman" , serif;">What is the probability the US and/or European governments pass fiscal stimulus packages of at least 2%/GDP per annum? </span></span></div>
</li>
<li dir="ltr" style="background-color: transparent; color: black; font-style: normal; font-variant: normal; font-weight: 400; list-style-type: disc; text-decoration: none; vertical-align: baseline; white-space: pre;"><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-family: "georgia" , "times new roman" , serif;">What is the probability that US and European monetary policy will prove ineffective over the next year--as demonstrated by a 5/30y curves in US and Germany flatter 1 year from now vs. where they are today? </span></span></div>
</li>
<li dir="ltr" style="background-color: transparent; color: black; font-style: normal; font-variant: normal; font-weight: 400; list-style-type: disc; text-decoration: none; vertical-align: baseline; white-space: pre;"><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-family: "georgia" , "times new roman" , serif;">How much of this is Soros-esque reflexivity, reflecting the “fear of fear itself” and a self-fulfilling prophecy of lower long-term interest rates? If you buy into that--what evidence can you bring to the table? </span></span></div>
</li>
<li dir="ltr" style="background-color: transparent; color: black; font-style: normal; font-variant: normal; font-weight: 400; list-style-type: disc; text-decoration: none; vertical-align: baseline; white-space: pre;"><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-family: "georgia" , "times new roman" , serif;">Curves have re-steepened in the past--prove to me why this time is different.</span></span></div>
</li>
</ul>
<span style="font-family: "georgia" , "times new roman" , serif;"><br /></span>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-family: "georgia" , "times new roman" , serif;">These are the type of questions that can get us past rank speculation and productive discussions about what is baked into the markets and how we can exploit that to generate alpha.</span></span><br />
<span style="background-color: transparent; color: black; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-family: "georgia" , "times new roman" , serif;"><br /></span></span>
<span style="background-color: transparent; color: black; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-family: "georgia" , "times new roman" , serif;">skewrisk@gmail.com</span></span><br />
<span style="background-color: transparent; color: black; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-family: "georgia" , "times new roman" , serif;">@EMinflationista</span></span></div>
EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com185tag:blogger.com,1999:blog-34323687.post-54870765541437239772019-08-29T05:07:00.001+01:002019-08-30T03:31:55.043+01:00The Argentina Siren Song And Where Else It Is Sung<span id="docs-internal-guid-f3d67889-7fff-f8f3-cfbd-652f7bb29cd0"></span><br />
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<span id="docs-internal-guid-f3d67889-7fff-f8f3-cfbd-652f7bb29cd0"><span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;"><span style="border: none; display: inline-block; height: 309px; overflow: hidden; width: 411px;"><img height="309" src="https://lh4.googleusercontent.com/4AphZWtBznrJTcbi0dYRUrJn_s4wHvnWNCdsirZ-24sgEui64x1R9s_S2Z8YXeWG6D1xiVVr6KVQR8ivfZlENzfuEYyU0eubiqmrcQsLp-n6Jc6IFZ6bUdrERNeYptQpx73vVzms" style="margin-left: 0px; margin-top: 0px;" width="411" /></span></span></span></div>
<span id="docs-internal-guid-f3d67889-7fff-f8f3-cfbd-652f7bb29cd0">
</span>
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<span id="docs-internal-guid-f3d67889-7fff-f8f3-cfbd-652f7bb29cd0"><span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">I’m back! After an extended leave of absence I’ve decided to start writing again. </span></span></div>
<span id="docs-internal-guid-f3d67889-7fff-f8f3-cfbd-652f7bb29cd0">
</span><br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span id="docs-internal-guid-f3d67889-7fff-f8f3-cfbd-652f7bb29cd0"><span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">Let’s start with a story familiar to those that read MM in my first term: Argentina. </span></span></div>
<span id="docs-internal-guid-f3d67889-7fff-f8f3-cfbd-652f7bb29cd0">
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">That cute little fella at the top of the page is already back, only a few short years after Macri’s victory put an end to the sordid story of Argentina’s last debt default in 2001. </span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">I’m not going to get into the economics or the various mistakes made by the current government and the IMF. </span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">Take a step back and think about how we got here, and the investor psychology required to move headlong back into Argentine debt: </span></div>
<ul>
<li><span id="docs-internal-guid-f3d67889-7fff-f8f3-cfbd-652f7bb29cd0"><span style="font-family: "arial"; font-size: 11pt; white-space: pre-wrap;">October 2015: Mauricio Macri defeats the ruling party-backed Daniel Scioli, putting a non-Peronist government back in power for the first time in a really long time. </span></span></li>
<li><span id="docs-internal-guid-f3d67889-7fff-f8f3-cfbd-652f7bb29cd0"><span style="font-family: "arial"; font-size: 11pt; white-space: pre-wrap;">Macri appoints one of the most technocratic governments in the history of emerging markets. Argentine economists up and down the tri-state area that had sought refuge on Wall Street over the past 15 years came home to work for and support the new government. </span></span></li>
<li><span id="docs-internal-guid-f3d67889-7fff-f8f3-cfbd-652f7bb29cd0"><span style="font-family: "arial"; font-size: 11pt; white-space: pre-wrap;">This new economic team quickly implements a series of orthodox policies and pitches a market friendly reform agenda with the goal of kick starting investment and growth. </span></span></li>
<li><span id="docs-internal-guid-f3d67889-7fff-f8f3-cfbd-652f7bb29cd0"><span style="font-family: "arial"; font-size: 11pt; white-space: pre-wrap;">Macri quickly negotiates an agreement with holdouts from the previous debt default, and issues a ton of bonds to pay them off and fund massive twin deficits </span></span></li>
<li><span id="docs-internal-guid-f3d67889-7fff-f8f3-cfbd-652f7bb29cd0"><span style="font-family: "arial"; font-size: 11pt; white-space: pre-wrap;">Investors rejoice and welcome Argentina back into the loving embrace of EM</span></span></li>
</ul>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">None of these really look like mistakes, do they? </span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">It started off well. The new bonds did well enough that the government was able to issue the famous Argentina century bond in June 2017. Later that year the government won important midterm elections that were seen as an important barometer for Macri’s success, political capital and chances of winning re-election. </span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">Less than two years later, this is the chart on the Argentina 2021 bond...which traded at 110 in Q3-17:</span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;"><span style="border: none; display: inline-block; height: 375px; overflow: hidden; width: 624px;"><img height="375" src="https://lh4.googleusercontent.com/vqMR7e6cjk5Uw5pDRXwbgkcEqTpZ9OqmaBMjfjarfBVQVRgbf-28x9rfut_vQRYIY1i586IgEevNH7WFGGL-qROgKxLJZ5BbmxRlL1eHmaFYfSZx38F8YVlU8Um0EhK2viJs229K" style="margin-left: 0px; margin-top: 0px;" width="624" /></span></span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">Those arrows are supposed to end in a skull and crossbones. </span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;"><span style="border: none; display: inline-block; height: 105px; overflow: hidden; width: 105px;"><img height="105" src="https://lh5.googleusercontent.com/c-zFGrnSAJN8hSqmN_ExUWvYEW0Hr6Cufjs828F0WI5M45a7obdm4BOVpcMfvHG4T1r6kM8f4D72OROlQhfdzyfChTeEMAuBmHnipGh8rG2Or6AUmi4B01OtE5wEBLJM5nCr3U75" style="margin-left: 0px; margin-top: 0px;" width="105" /></span></span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">There, you get the idea. That’s what they call a “sudden stop” in emerging markets. That influx of foreign capital has gone to money heaven. It doesn’t come back...the next one to bring capital to Argentina is that bird--which is </span><a href="https://www.bloomberg.com/news/articles/2019-08-28/argentina-seeks-to-extend-debt-maturities-as-reserves-tumble" style="text-decoration-line: none;"><span style="color: #1155cc; font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">why we’re already at this stage: </span></a></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;"><span style="border: none; display: inline-block; height: 211px; overflow: hidden; width: 590px;"><img height="211" src="https://lh5.googleusercontent.com/UHH81FVoGPM3qewNNkob9TisozVuqA5r4nIGth0yd6EaIiaFX0cWMqI8ARV3GY3TTGIenGlCOG4Mc_gNnBvlFGlHYFrNV4BWXIzVuEExV5_ChMkhIR8EBb-_mK58nbY7joJJ7jMI" style="margin-left: 0px; margin-top: 0px;" width="590" /></span></span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">You can cite a few reasons for the descent from ten points over par to recovery value in less than 24 months. The government failed to deliver on growth, didn’t get pension reform done, there was a drought, low soybean prices, crappy growth in Brazil, USD strength, global manufacturing slowdown, you name it. Sure, maybe a confluence of all those things. </span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">But let's look back at the initial bullet points. Where did Macri go wrong? </span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">I’d argue it was in the hiring of a ton of technocrats to run the economic program. </span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">One can imagine how the conversations went. We’ll pay off Elliott. We’ll float the peso. We’ll institute inflation targeting at the central bank. Investors will love it. They’ll come to us in droves. </span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">Yep, that’s how it went down. These guys played a siren song for EM investors, and they ate it up. They played every tune that is music to their ears….abolish capital controls, reform, inflation targeting, de-regulation, tax cuts...liquidity….oh yeah baby…</span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">Before you know it, by mid-2018 there is $100bn in debt on the books and the fundamentals are deteriorating. Suddenly the IMF is back in town, an organization that has a favorability rating in Argentina on par with Trump on your average university campus. </span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;"> By 2019 the IMF has stabilized the situation well enough to buy Macri some time ahead of the October election. The economy wheezes along. Do investors take advantage of the opportunity to scale out of Argentine debt, given the poisonous political nature of the government’s economic record--and one that got into bed with the IMF? </span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">No, instead foreign investors ate it up! This is a list of the top ten holders of the Argentina 2021: </span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;"><span style="border: none; display: inline-block; height: 289px; overflow: hidden; width: 624px;"><img height="289" src="https://lh4.googleusercontent.com/VeoXrdMwfU5MrUI6YbidD-gJTnLkPsqDT4KRwDIbFthck8E7r0q9eqYkHEYRcUxeCL-0BmVARaTFAYHd3QC4714dcmvxYFc2MD0r0J157emYXscENJTFHs-kBDGECdq6syuAqCWe" style="margin-left: 0px; margin-top: 0px;" width="624" /></span></span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">Same chart for the argentina 2028 (the only one that is reducing is blackrock, and only because they updated their data already): </span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;"><span style="border: none; display: inline-block; height: 395px; overflow: hidden; width: 624px;"><img height="395" src="https://lh4.googleusercontent.com/S4BE1hZXlLWelnklVMtCjOWsc6hHuac9EEm4V8X9TM13gQLahBdUaUyAxL0YDOVBSe9ZKrkOnnm0chmyxpTegZaF1snHManpgWMib2p-1H-gWgvc7k_H2Qrd7is42vbuF-Fq7iSK" style="margin-left: 0px; margin-top: 0px;" width="624" /></span></span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">Real money was not only holding these bonds, they were buying more. They were convinced Macri was going to win and make them a fortune. Take a look at the country weights of some of these mutual funds: you’ll find one after another is, or was anyway...overweight Argentina. </span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">They bought into the swan song that the government told them. They succumbed to one of the classic behavioral biases: affinity bias. “These guys are just like us! They say they’ll win the election. We can trust them.”</span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">There is also some confirmation bias there--where investors believed the orthodox path the government had taken was going to work. Why? Because that’s what they taught us in school! And the election?? Well, those Argentines….they know better than to bring the Kirchners back in, right? </span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">And there is the last big mistake. Can you name one technocratic, dare I say, elitist, candidate that has won an election lately? One might say Macron...but look how that’s turned out. Sank without a trace. </span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">Yet despite a terrible economic record, a leg shackled to a hated foreign organization and a global trend against orthodox, technocratic politics, foreign investors convinced themselves that Macri was going to win. </span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">Right until he lost big. </span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">And that brings us back to what Argentina can teach us about the rest of the world. Where else are investors buying into the swan song? </span></div>
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<ul>
<li><span id="docs-internal-guid-f3d67889-7fff-f8f3-cfbd-652f7bb29cd0"><span style="font-family: "arial"; font-size: 11pt; white-space: pre-wrap;">Brazil: sing it to me Captain...pension reform….deregulation….but growth still sucks and the government is still drowning in debt and red tape</span></span></li>
<li><span id="docs-internal-guid-f3d67889-7fff-f8f3-cfbd-652f7bb29cd0"><span style="font-family: "arial"; font-size: 11pt; white-space: pre-wrap;">Italy: wait, it is POSITIVE the most popular politician in the country just got heaved out of the government? That is going to make him LESS popular? </span></span></li>
<li><span id="docs-internal-guid-f3d67889-7fff-f8f3-cfbd-652f7bb29cd0"><span style="font-family: "arial"; font-size: 11pt; white-space: pre-wrap;">UK: Maybe Boris can pull it off. Or maybe people still believe he can. </span></span></li>
<li><span id="docs-internal-guid-f3d67889-7fff-f8f3-cfbd-652f7bb29cd0"><span style="font-family: "arial"; font-size: 11pt; white-space: pre-wrap;">United States: I can think of one good scenario going into the 2020 election, but it involves Joe Biden. With the S&P 4% off the highs, investors believe the most beautiful song is still sung by US multinationals. </span></span></li>
</ul>
<div>
<span style="font-family: "arial";"><span style="font-size: 14.6667px; white-space: pre-wrap;">This was a big land mine for foreign investors. They stepped on it--not just because they got the story wrong--which happens to everyone. But because they had a few behavioral blind spots that we can all learn from. </span></span><br />
<span style="font-family: "arial";"><span style="font-size: 14.6667px; white-space: pre-wrap;"><br /></span></span>
<span style="font-family: "arial";"><span style="font-size: 14.6667px; white-space: pre-wrap;"><a href="https://twitter.com/EMinflationista" target="_blank">@EMInflationista</a></span></span></div>
</span>EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com138tag:blogger.com,1999:blog-34323687.post-57999887744658620302019-05-08T15:14:00.001+01:002019-05-08T15:14:21.169+01:00Play nicely, please.I've not been following the comment section in recent months, but it seems as if trollery has returned in force. Please use this post for fresh discussion, and if you're a troll please move along. (Let me know if commenting privileges are being abused, please.)Macro Manhttp://www.blogger.com/profile/12324967552369915949noreply@blogger.com188tag:blogger.com,1999:blog-34323687.post-44186820062037527632019-01-16T00:56:00.000+00:002019-01-16T00:56:04.484+00:00Special Guest Post: PG&E's Risk Management Fail<br />
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There’s a saying that goes
“mistakes are the tuition of learning”. The PG&E case in California is rife
with risk management lessons where we can learn from the mistakes of others
while they pick up the tab.</div>
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<o:p></o:p></div>
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A big story in the financial news lately is the significant
liabilities incurred by Pacific Gas and Electric or PG&E, the biggest
electric company in California. The company’s core business is to generate and
distribute electricity, and as a part of that business, they maintain the power
lines that connect the power grid. <o:p></o:p></div>
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Government authorities have concluded that many of the fires
that ravaged California over the past two years have been the result of power
lines falling into trees, and California law finds PG&E liable for any
costs related to fires where power lines were at fault. Matt Levine, a man so cynical and sarcastic he makes me look downright kind and forgiving, <a href="https://www.bloomberg.com/opinion/articles/2019-01-14/money-stuff-pg-amp-e-pays-the-cost-of-fires" target="_blank">crushes the capital structure story. </a> Levine brilliantly points out that there weren't any secrets here....only a massive unfunded liability that had PG&E whistling past the graveyard for years...and certainly throughout 2018. <o:p></o:p></div>
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PG&E is, for all intents and purposes, bankrupt. How did a regulated utility get to that point so quickly? What were the warning flags? Was there a trade here? </div>
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Let’s take a look at how a macro trader might have thought
about the risk in PG&E stock.<o:p></o:p></div>
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Here is the stock chart back to 2004. In early 2017, you
were probably feeling pretty good. Nice run higher. No big surprises. The
dividend has been increased consistently over the past two years and credit
ratings has been raised. <o:p></o:p></div>
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PG&E Stock Price, 2004-2018<o:p></o:p></div>
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEihBki80GdmQAITc5fRSa_3lJsJlvKtV68FZrT8-uApZOsTIZ0seHzxbArrfa2LEge-urffZv3t0TR6NpUPHthxOKZRwd414gI81gQQf3pY4KUk7s4A_fiCRHGfJuti_VkMy4AHYQ/s1600/stock+chart.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em; text-align: center;"><img border="0" data-original-height="425" data-original-width="1187" height="227" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEihBki80GdmQAITc5fRSa_3lJsJlvKtV68FZrT8-uApZOsTIZ0seHzxbArrfa2LEge-urffZv3t0TR6NpUPHthxOKZRwd414gI81gQQf3pY4KUk7s4A_fiCRHGfJuti_VkMy4AHYQ/s640/stock+chart.jpg" width="640" /></a><br />
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<b><i>Source: Bloomberg<o:p></o:p></i></b></div>
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<o:p> </o:p> </div>
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Then in early 2017 a fire in northern California burned
36,000 acres and destroyed 5600 structures, including 2800 homes and killed 22
people. The stock fell precipitously. The 1 week fall in the stock price
was somewhat similar to what happened in the financial crisis. </div>
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As a macro trader, how did you price fire risk before
and after the 2017 fires? <o:p></o:p></div>
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Did you have this quote in your back pocket as the risk
manager? “<b><u><span lang="EN" style="mso-ansi-language: EN;">“California law
makes utilities responsible for any fire started by their equipment, even if
they weren’t negligent.” </span></u></b><span lang="EN" style="mso-ansi-language: EN;"> If you did, you might have forecasted a big loss, bigger than any
drawdown in recent history--and certainly bigger than the PG&E liquid balance sheet-- based on the damage estimates of fires in recent
history. <u><o:p></o:p></u></span></div>
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But as Donald Rumsfeld taught us, there are "known knowns" and unknown knowns, In 2017 the game changed….PG&E fire risk was a "known known". <a href="https://www.epsilontheory.com/harvey-weinstein-common-knowledge-game/" target="_blank">Ben Hunt at Epsilon Theory </a>might say fire risk at PG&E in 2018 was public knowledge, but not *common knowledge*. The balance sheet tightened and politicians started to circle the company. While there was an effort to protect the company from further extreme liabilities by allowing them to pass costs from these liabilities onto ratepayers, the latest round of fires in 2018 that were even more severe in terms of acreage, homes and lives lost, put the company in even greater peril. Now bankruptcy is on the table.</div>
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<o:p></o:p></div>
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When the November 2018 Camp Fire destroyed about 10,000 structures, about 100 people and wiped an entire town of 20,000 people off the map, PG&E was finished. But even then, it took a while before common knowledge caught up. </div>
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Yet those looking for how this risk was priced could have also used
credit markets to illustrate this increasing risk…below I have a chart of
PG&E’s credit risk in 5 year credit default swaps (CDS). Note how
throughout 2018 credit risk was increasing (a higher or wider CDS spread
reflects an increasing risk of default), even before the Camp Fire Bottom line, bond
markets sniffed this out while equity markets pushed the stock 9% higher in
2018 before the fire on November 8. <o:p></o:p></div>
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<o:p></o:p></div>
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PG&E 5y CDS<o:p></o:p></div>
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjFp18JB0A4em9FzGmjKgC3QC0BT3Hjq4BiH64pSFYGeZjR1HtHUe9a9GczDK8X_0WMgZmcwECWOauVGUfocqbd8cvLKQbKV_rdn0ppDCYjdrzuHanp8r76jBA_2vWBhwGcaDaCqg/s1600/cds+chart.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em; text-align: center;"><img border="0" data-original-height="506" data-original-width="1013" height="318" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjFp18JB0A4em9FzGmjKgC3QC0BT3Hjq4BiH64pSFYGeZjR1HtHUe9a9GczDK8X_0WMgZmcwECWOauVGUfocqbd8cvLKQbKV_rdn0ppDCYjdrzuHanp8r76jBA_2vWBhwGcaDaCqg/s640/cds+chart.jpg" width="640" /></a><br />
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<b><i>Source: Bloomberg<o:p></o:p></i></b></div>
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Do you think it was a coincidence that PG&E management did little to recapitalize the balance sheet for fire liabilities or commit to an extreme and fast maintenance fix when they couldn't pass the costs on to tax payers? Which means....it would have been at the cost of the stock price, their bonuses, stock options and probably jobs? </div>
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PG&E management and stockholders clearly dramatically underestimated
the costs and liabilities attached to fire risk. Some was willful, some was stupidly optimistic, and some was no doubt simply a combination of unlucky and ignorant. The fires had incredible
human costs. It will also go down as a case study in capital structure, management incentives, and the value of macro analysis that identifies incentives and opportunities across asset classes. </div>
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<o:p></o:p></div>
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EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com560tag:blogger.com,1999:blog-34323687.post-25734910367350690642018-10-18T16:43:00.000+01:002018-10-18T16:43:13.990+01:00P/E's are re-rating<div style="text-align: center;">
Its been a long time, we shouldn't of left you</div>
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<br />
While its been a while since I posted here, not much has really changed in financial markets this year. People still worried about China, US FAANG stocks still going up, Europe is always a mess.<br />
<br />
While there have been moves in sectors and markets this year for sure (EM and Frontier managers have been busy) the real big change in markets, which perhaps still needs many more months of digestion is the rise in US Long rates (ie 10 and 30 years). Since breaking the psychological levels Gundlach and others have mentioned as 'lines in the sand' price action has been pretty boring. But I do tend to agree with them that rates have entered into a new regime.<br />
<br />
Of course the first asset class to react to higher rates was the Dollar and EM. They seem to have quite a bit priced in already and add in a pinch of China slowdown concerns its easy to see why they have under performed. I dont have much to add. Perhaps they are oversold. You can add in US homebuilders and Capital Goods to that list as well.<br />
<br />
The next to go IMO has been parts of the duration trade. Muni's, preferreds. They have moved a little but they can still move a lot more if rates go much higher.<br />
<br />
The last to go, and we all knew it was going to take more time than markets, was the US stock market. Its been the best place to be for the past several years and its more of a growth vs value play which means rates matter even less.<br />
<br />
If you only follow the price chart, you could be forgiven for assuming the current bull is intact. I'd have to agree as there has yet to be a flashing 'dow sell signal' yet. Though I could easily see a topping pattern set up from here.<br />
<br />
But lets turn to a few charts of the market P/E and EPS, which combined give you the price.<br />
<br />
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You can see that for most of 2017, 17.5x PE was a nice level the market was supporting. Then in January, when analyst estimates really got revised higher for the tax reductions we dropped down to 16x. Its been hanging around 16-17 for most of the year and on the recent dip, dropped below 16. Some, like Morgan's equity strategist now see 16 as the ceiling for the market, not the floor. His reasoning is that higher interest rates impact investors risk premium. Something to think about. Russell seems to have go the message loud and clear</div>
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While companies in the US may still be beating earning and buying back shares, its possible that investors re-rate regardless. </div>
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Now what happens is EPS estimates start to turn down, like they are in Europe. Well then that would be cause for real concern. But we're not there yet. </div>
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<br />abee crombiehttp://www.blogger.com/profile/13320039155613443039noreply@blogger.com528tag:blogger.com,1999:blog-34323687.post-44245211476644539782018-07-10T02:03:00.000+01:002018-07-10T02:03:04.241+01:00SEK Sliding Away<span style="font-family: Arial, Helvetica, sans-serif;">One underrated victim of the march of the euro off of near-parity EURUSD over the last couple of years has been the humble Swedish krona. While EURCHF, EURGBP, and the various CEE crosses linked to EUR tend to get more attention, the move in EURSEK has been quite something.</span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">Unfortunately for punters, that move has helped disconnect EURSEK from a variety of indicators that have proven quite helpful in the post-crisis environment. A primary example would be the relative size of the ECB and Riksbank's balance sheets respectively. As shown below, you could have done much worse than simply track the relative sizes of the balance sheets from around 2010 to 2016 if you were going to estimate what would happen to EURSEK. Since then (and really, since the euro took off more broadly), the correlation has completely flipped.</span><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEivC_jiPiS0kJTVk74FPdL5Yvt9J-PlT4BDLbhHU6_VhVU-8GiF7NPeGVA86ftzuGZBzAlhhr7BdSHYvpzS8QuFQ2gFCxg1Qz80hI2RqgcEpAeDfXDcZ5E7mhxIEPv0D9O1LfeP/s1600/SEK+7.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><span style="font-family: Arial, Helvetica, sans-serif;"><img border="0" data-original-height="339" data-original-width="686" height="316" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEivC_jiPiS0kJTVk74FPdL5Yvt9J-PlT4BDLbhHU6_VhVU-8GiF7NPeGVA86ftzuGZBzAlhhr7BdSHYvpzS8QuFQ2gFCxg1Qz80hI2RqgcEpAeDfXDcZ5E7mhxIEPv0D9O1LfeP/s640/SEK+7.png" width="640" /></span></a></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">Another way to look at things would be to compare the relative interest rates of the two currencies. While benchmark Eurozone rates have risen somewhat relative to their Swedish equivalents, they would imply a much lower EURSEK rate and a significant SEK rally from here.</span></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgSa5A9O8Y1ZOXY56OQoMyzgFISmU-bQme62I2UQmpsZuqx7dop0uWzmjPOiqC0bVv0b4X_09yyb-eSDdXZAKwI_KR9n-X7tvwR0NEKGNy5lROED4v_kl2si4V_8-E4XYDn9oV9/s1600/SEK+9.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><span style="font-family: Arial, Helvetica, sans-serif;"><img border="0" data-original-height="332" data-original-width="712" height="298" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgSa5A9O8Y1ZOXY56OQoMyzgFISmU-bQme62I2UQmpsZuqx7dop0uWzmjPOiqC0bVv0b4X_09yyb-eSDdXZAKwI_KR9n-X7tvwR0NEKGNy5lROED4v_kl2si4V_8-E4XYDn9oV9/s640/SEK+9.png" width="640" /></span></a></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">Of course, the long end might be the wrong place to look for interest rate differential drivers. But the short rate differential isn't exactly cooperating either. Relative 1y forward 1y rates worked <i>very</i> well as a fair value for EURSEK from 2008 through 2014 but EURSEK then undershot and has now overshot. In any event, EUR 1y1y rates less SEK 1y1y rates are at multi-year lows while EURSEK is near the highest levels since the crisis.</span></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh8sCoYZ9QayFLXIo_SXO7pXxY6pZ_fFcmRpAPtZNxmA2fdODaBZNKr9oPFfJGtMhFafV4Wn0LRFrusDhaftmG2PS2G4FgoU7hyphenhyphenkQlX750i5ikdRuuLnmw1qYh_6E2M0DqFyJcE/s1600/SEK+3.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><span style="font-family: Arial, Helvetica, sans-serif;"><img border="0" data-original-height="347" data-original-width="704" height="314" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh8sCoYZ9QayFLXIo_SXO7pXxY6pZ_fFcmRpAPtZNxmA2fdODaBZNKr9oPFfJGtMhFafV4Wn0LRFrusDhaftmG2PS2G4FgoU7hyphenhyphenkQlX750i5ikdRuuLnmw1qYh_6E2M0DqFyJcE/s640/SEK+3.png" width="640" /></span></a></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">With the traditional market reference points no help, a search for explanations means a trip further afield into a data dive. Relative international position may be helpful. During the crisis, EUR surged, but as it worked off that crisis dislocation the Eurozone current account surplus persistently increased relative to that of Sweden's. As the Swedish current account advantage worked itself off, EURSEK headed persistently higher. Economic theory would generally suggest the <i>opposite</i> should happen: current account surpluses rising should lead to <i>depreciation</i> rather than <i>appreciation</i>. </span></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhaZ6WvCEndEfc8JEV5L61J29s2qJvyhHArbSQhDMzkuCvjlilbDBsHm5W96fcqHEXGVH9pHrHB8lGCqM-LP3Bqgtbee7YaoHFA_0PF90RPOKlll6_qKsHi7jLl4LuUVOvDHRQC/s1600/SEK+4.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><span style="font-family: Arial, Helvetica, sans-serif;"><img border="0" data-original-height="347" data-original-width="704" height="314" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhaZ6WvCEndEfc8JEV5L61J29s2qJvyhHArbSQhDMzkuCvjlilbDBsHm5W96fcqHEXGVH9pHrHB8lGCqM-LP3Bqgtbee7YaoHFA_0PF90RPOKlll6_qKsHi7jLl4LuUVOvDHRQC/s640/SEK+4.png" width="640" /></span></a></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">Of course, using total-economy aggregates can be deceptive, so we'll also take a look at the bilateral trade surplus. That story is a very one-way street: Eurozone trade surpluses have risen steadily and in-line with current account surpluses for almost two decades. Over the past 5 years or so, that appears to have been a significant driver of EUR appreciation relative to SEK.</span></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEheDHv_HeVILEdpuiqyraYoWPvz4DQnqRNhXXK4FxGux_9ZM64V5qgFoDShYeGdAQhE0aA0otGMybcoZX0qoDkq1hrGBzI6tmW949kFuqKNVaXl3nt-qeTwUaqUDhA0hYqN8mrY/s1600/SEK+5.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><span style="font-family: Arial, Helvetica, sans-serif;"><img border="0" data-original-height="347" data-original-width="704" height="314" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEheDHv_HeVILEdpuiqyraYoWPvz4DQnqRNhXXK4FxGux_9ZM64V5qgFoDShYeGdAQhE0aA0otGMybcoZX0qoDkq1hrGBzI6tmW949kFuqKNVaXl3nt-qeTwUaqUDhA0hYqN8mrY/s640/SEK+5.png" width="640" /></span></a></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">Finally, taking a step back to the broader picture, the SEK REER has persistently weakened as its current account has deteriorated. For now, the direction of travel in the Swedish surplus seems a highly relevant factor in the decline in SEK on a broader basis.</span></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjVOYvQgErzmwc6dDEw6cxhNPU6xHUf5_8JFwb2dSNiFrRG_DB5XP66eIHzCC6pozW8z4ezaq3XFvpbI0p8mc8IlWdvlz2kYxL4PagP9Xdh7vXBnAapK3pD6t9MGHttLYRepL5F/s1600/SEK+6.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><span style="font-family: Arial, Helvetica, sans-serif;"><img border="0" data-original-height="333" data-original-width="721" height="294" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjVOYvQgErzmwc6dDEw6cxhNPU6xHUf5_8JFwb2dSNiFrRG_DB5XP66eIHzCC6pozW8z4ezaq3XFvpbI0p8mc8IlWdvlz2kYxL4PagP9Xdh7vXBnAapK3pD6t9MGHttLYRepL5F/s640/SEK+6.png" width="640" /></span></a></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">As a final stop on our tour de krona, the Riksbank. While inflation has picked up a bit and target measure CPIF is reliably printing in the 2% YoY range, much of that is energy with CPIF ex Energy around 1.5%. Unemployment has been falling steadily and continues to trend lower, sitting around 6% versus prior cycle lows of around 5.5%. The output gap is trending slowly tighter and sits around 65 bps of GDP per OECD and IMF estimates. Finally, industrial output is steady around 90-91% of capacity. All of this gives the Riksbank as much latitude as it wants to keep kicking the can. In short, don't look to the Sveriges Riksbank as a catalyst for stronger SEK.</span></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjCaLzZJfnP2SUyPxGXeHkX6ta4n4kEPxfu9kpPsnDcxBaacRL49TxWOJymJqsrr2YXDSHa494jAImdhO_QBCppCBQ1m9ZchqEyci2j7zSrBc3qRzjfp9TJt0JByPObsLFRaEqc/s1600/SEK+10.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="382" data-original-width="758" height="322" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjCaLzZJfnP2SUyPxGXeHkX6ta4n4kEPxfu9kpPsnDcxBaacRL49TxWOJymJqsrr2YXDSHa494jAImdhO_QBCppCBQ1m9ZchqEyci2j7zSrBc3qRzjfp9TJt0JByPObsLFRaEqc/s640/SEK+10.png" width="640" /></a></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">To close things out, what we can say about SEK is that its trend, economic data, and central bank's tendencies are for a weaker krona. On the other hand, the EUR's strength has been especially dramatic versus SEK given how closely the two economies are linked. That suggests that EURSEK would be an attractive portfolio overlay for a set of trades which benefit from a broadly stronger EUR if not as an outright long or short in its own right.</span></div>
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Cackalack Capitalhttp://www.blogger.com/profile/10765822411082053545noreply@blogger.com234tag:blogger.com,1999:blog-34323687.post-9514818008846894412018-07-06T05:40:00.003+01:002018-07-06T12:24:42.469+01:00Andres Manuel Lopez Obrador Explained for Investors in MexicoGreetings again Macro Man readers! Those that remember my work here will know that I couldn't let the Mexican election pass without some sort of commentary. I decided it would be a little passe to write up 800 words on my opinion. Instead I decided to let a talking rabbit do the work for me. Enjoy!<br />
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Shawn<br />
@EMInflationistaEM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com36tag:blogger.com,1999:blog-34323687.post-59372264044704048772018-05-29T09:00:00.000+01:002018-05-29T09:00:00.134+01:00Supply-Side Crudenomics<span style="font-family: arial, helvetica, sans-serif;">With front-month WTI futures suffering their worst 2 days since 2016 into the start of the US long weekend Friday and a sudden proliferation of "</span><a href="https://www.blogger.com/" style="font-family: arial, helvetica, sans-serif;"><span id="goog_234877823"></span>lower<span id="goog_234877824"></span></a><span style="font-family: arial, helvetica, sans-serif;"> </span><a href="https://www.bloomberg.com/news/articles/2018-05-23/the-100-a-barrel-oil-wager-comes-back-to-the-options-market" style="font-family: arial, helvetica, sans-serif;">for</a><span style="font-family: arial, helvetica, sans-serif;"> </span><a href="http://fortune.com/2018/05/28/opec-russia-oil-prices-production-100/" style="font-family: arial, helvetica, sans-serif;">longer</a><span style="font-family: arial, helvetica, sans-serif;"> </span><a href="https://qz.com/1275211/all-the-reasons-crude-oil-might-go-back-to-100-a-barrel/" style="font-family: arial, helvetica, sans-serif;">is</a><span style="font-family: arial, helvetica, sans-serif;"> </span><a href="https://www.reuters.com/article/us-opec-oil-exclusive/exclusive-opecs-new-price-hawk-saudi-arabia-seeks-oil-as-high-as-100-sources-idUSKBN1HP1LB" style="font-family: arial, helvetica, sans-serif;">dead</a><span style="font-family: arial, helvetica, sans-serif;">" analyses, crude has justifiably loomed large in the eyes of professionals the world over, even with lots of light and some heat in Turkey (</span><a href="https://www.ft.com/content/fc3e85da-624a-11e8-a39d-4df188287fff" style="font-family: arial, helvetica, sans-serif;">reforms</a><span style="font-family: arial, helvetica, sans-serif;"> to the CBRT's rate transmission mechanism), Italy (a technocratic </span><a href="https://www.ft.com/content/940ad83e-6262-11e8-90c2-9563a0613e56" style="font-family: arial, helvetica, sans-serif;">PM choice</a><span style="font-family: arial, helvetica, sans-serif;"> from Mattarella that will most likely wind up with new elections), and Spain (Rajoy faces a </span><a href="https://www.ft.com/content/9d91b30a-6262-11e8-a39d-4df188287fff" style="font-family: arial, helvetica, sans-serif;">no-confidence vote</a><span style="font-family: arial, helvetica, sans-serif;"> which </span><i style="font-family: arial, helvetica, sans-serif;">may</i><span style="font-family: arial, helvetica, sans-serif;"> result in elections though that's TBD). As a side note, the Cackalack BTP </span><a href="http://macro-man.blogspot.com/2018/05/arm-me-with-carry-conte-drop-load-on.html" style="font-family: arial, helvetica, sans-serif;">view</a><span style="font-family: arial, helvetica, sans-serif;"> most recently published has been positively roasted by the market, though nothing that's happened since it was posted has fundamentally changed our perspective...that may shift if Lega election rhetoric shifts more aggressively anti-euro.</span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Your humble correspondent doesn't have very many consistent views on commodities, but one of them is that speculation rules in the asset class. With roughly $190bn worth of crude represented in the open interest for NYMEX WTI futures alone, it's frankly quite difficult to have any other perspective.</span><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhrX-ayAdRIQ0cynFEGr2pb-pIKhrvagva6GgvmM9J5u9IZotSp7rY1YHb7j9lNWgE6a58SMWIaOXTsy9XXBHK_fF1JLBLF7nXKXNfHGySPRPNvwR97nOpL6tFwSINDA8EwxlUv/s1600/CL+12.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="642" data-original-width="927" height="442" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhrX-ayAdRIQ0cynFEGr2pb-pIKhrvagva6GgvmM9J5u9IZotSp7rY1YHb7j9lNWgE6a58SMWIaOXTsy9XXBHK_fF1JLBLF7nXKXNfHGySPRPNvwR97nOpL6tFwSINDA8EwxlUv/s640/CL+12.png" width="640" /></a></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">But fundamentals are surely worth a look anyways, right? Sure, why not, and as this outlet's excellent tagline always reminds us, TMM always offers a money back guarantee, so time spent reading is all you risk.</span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">As shown below, Q4 of last year saw global crude markets in a 37 bps deficit as a percentage of global crude supply, the third successive quarter where demand outstripped supply for the commodity following a grim run of excess supply dating to mid-2014.</span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">It's an awful pain to be working with numbers that aren't just backward looking but released at an interminable lag so in the second chart below we show the QoQ change in US inventories (aggregated from the almost-real-time weeklies released by the EIA). As shown, you can miss some big swings in global supply/demand of crude by going with the US weeklies but at the end of the day they've been reasonably accurate over the last several years. Q1 and Q2 to date are tracking enormous sequential declines of ~3%, suggesting similar supply-demand imbalances and higher prices yet to come.</span><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj7Ig4cH3Uxf439wUbsfgxNgwGjiO2tDhVnik93vhe_zjBe8QRO8HZct_cOYq9W2CddCh3fAwpcoPuQAQ2lAMiApFfzapa6SkRDeEZ8Ax6duJB6dxXJazKOk6VvNxnlPwQW6ZvP/s1600/CL+3.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="323" data-original-width="554" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj7Ig4cH3Uxf439wUbsfgxNgwGjiO2tDhVnik93vhe_zjBe8QRO8HZct_cOYq9W2CddCh3fAwpcoPuQAQ2lAMiApFfzapa6SkRDeEZ8Ax6duJB6dxXJazKOk6VvNxnlPwQW6ZvP/s1600/CL+3.png" /></a></div>
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<span style="font-family: arial, helvetica, sans-serif;">The crude curve basically concurs. With the 1st and 7th month Brent futures contracts (for delivery in July and January, respectively) logging a ~$2 backwardation, the curve is consistent with supply-demand imbalance of at least 1-2% of production, albeit less reliably than our estimates based on US inventory tracking.</span><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEho3DbalxfB1sJ_uFsQlCkfszjDGA_ELCOMXZxhL3qJjxTOMtJsnCMAYuYV4RgJ3H9WVRD-pHC7HgozVH8AVQ7UOf-hunukNrnGwGH4Pe82auSob34gPgEfOH5ilQ05UJqOmTjz/s1600/CL+4.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="340" data-original-width="550" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEho3DbalxfB1sJ_uFsQlCkfszjDGA_ELCOMXZxhL3qJjxTOMtJsnCMAYuYV4RgJ3H9WVRD-pHC7HgozVH8AVQ7UOf-hunukNrnGwGH4Pe82auSob34gPgEfOH5ilQ05UJqOmTjz/s1600/CL+4.png" /></a></div>
<span style="font-family: "arial" , "helvetica" , sans-serif;"><br /></span><span style="font-family: arial, helvetica, sans-serif;">So for now, it looks like it's reasonable to assume demand continues to outstrip supply in crude markets. Will that continue forever? Of course not, but one point we did find interesting in the course of knocking these charts together is illustrated below. From 2000 to 2011, over 5 year periods the elasticity of crude to supply and demand was almost always above zero. That is, demand and supply both tended to rise in the face of higher prices and fall in the face of lower prices. That changed a bit in the 5 years ending 2012, when the opposite prevailed for a short period of time, but since 2014 both supply and demand changes relative to price have been negative. </span><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjxjCSOLQJJYmtYV4C0jE2tdHb2IYhWI2G_ELuNfk5xv5qX_TphmyYxXJTHPeDQ4BlNZiRdgTBg9k9HNrSt7cV3ZnG5Kn1knfHYo3s3oHy_7m7cxyD3-eWQP-L4JderaDE7W-Co/s1600/CL+5.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="326" data-original-width="545" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjxjCSOLQJJYmtYV4C0jE2tdHb2IYhWI2G_ELuNfk5xv5qX_TphmyYxXJTHPeDQ4BlNZiRdgTBg9k9HNrSt7cV3ZnG5Kn1knfHYo3s3oHy_7m7cxyD3-eWQP-L4JderaDE7W-Co/s1600/CL+5.png" /></a></div>
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<span style="font-family: arial, helvetica, sans-serif;">Now, calculating these elasticities is of course a tricky business and we'd be the first to say this is a <i>very</i> simplisitic approach. [By the way, if you have a better one, we'd love to hear about it in the comments!] But the fact remains something has definitely changed in the crude markets post-2011, and we're not so sure the "shale swing producer" thesis is the one reflected in the chart above. Theories are of course welcomed, but taken at face value the regime change suggested in the chart below leads us to believe that high prices won't necessarily curtail demand much, and that in turn suggests more (or exclusive) focus should be on the supply-side of the crude markets. If that's correct, it's going to be a very good summer for oil bulls, recent wobbles aside.</span><span style="font-family: arial, helvetica, sans-serif;"> </span>Cackalack Capitalhttp://www.blogger.com/profile/10765822411082053545noreply@blogger.com71tag:blogger.com,1999:blog-34323687.post-30254374038289759432018-05-22T02:22:00.000+01:002018-05-22T11:17:05.528+01:00Arm Me With Carry, Conte Drop A Load On 'Em...BTP, How Can I Explain It?<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiw0X1Iy4wTP2wXLUZtQx5z4gMxFfYoXsh_cXNIJVq5l0LMVWmLcpmZ7c0mAwnNLGLtlbA0K4hEEx6M5o6-blsAouycid6rhyphenhyphenPgIt5dmaQYBfT0JllI_fzRPYpQHghQcPQrPUcM/s1600/BTP+7.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><span style="font-family: "arial" , "helvetica" , sans-serif;"><img border="0" data-original-height="819" data-original-width="1024" height="511" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiw0X1Iy4wTP2wXLUZtQx5z4gMxFfYoXsh_cXNIJVq5l0LMVWmLcpmZ7c0mAwnNLGLtlbA0K4hEEx6M5o6-blsAouycid6rhyphenhyphenPgIt5dmaQYBfT0JllI_fzRPYpQHghQcPQrPUcM/s640/BTP+7.jpg" width="640" /></span></a></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">With Italian debt markets feeling an awful lot like everyone's old friend Wile E. Coyote after a bad run in with The Market Formerly Known As The Roadrunner, the old saws are at it again: <i>of course</i> lending money at negative rates to Italy of all places was going to go poorly! Just like that century bond in Argentina was such a bad idea. </span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Similar to the century bond claims, which have been given good treatment by <a href="https://twitter.com/barnejek/status/994688207697661953">others</a>, including <a href="https://twitter.com/EMinflationista/status/994037670128087041">TMM's Shawn</a>, context is absolutely necessary for the case of Italian debt spreads. First off, let's keep in mind that even with a serious rough patch in 2011 and the mother of all duration rallies in all things safe and EUR-denominated since, BTP futures have <i>outeperformed</i> bunds since inception. In the chart below, we show the relative performance of IK futures (~10y BTPs, currently IKM8) versus bund futures, since the inception of the IK futures. For the record, these two contracts' duration has always been within 5% of each other with a median of 36 bps difference since inception. So we don't need to worry much about adjusting for duration to get a like-for-like comparison of rate risk. We also have availed ourselves of Bloomberg's roll-adjustment feature to make sure that roll yield and CTD differences are all sorted out.</span><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi7eON4MjwhzoL17OFnsHnm4_3foFlEJsJ0R4QfzDW5pLURbSsTmB_LLp3YOTqfLyaJUtKVahtz_z_8A75RqOl0wS3k1T7OO5ejXZWcQEcwVPuiQ_umaW6glHtjcgs__AjiBMW8/s1600/BTP+1.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><span style="font-family: "arial" , "helvetica" , sans-serif;"><img border="0" data-original-height="351" data-original-width="616" height="364" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi7eON4MjwhzoL17OFnsHnm4_3foFlEJsJ0R4QfzDW5pLURbSsTmB_LLp3YOTqfLyaJUtKVahtz_z_8A75RqOl0wS3k1T7OO5ejXZWcQEcwVPuiQ_umaW6glHtjcgs__AjiBMW8/s640/BTP+1.png" width="640" /></span></a></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Now, granted, there have been some excellent directional trading opportunities for the spread. 2011 is a good example, as was the peripheral widening of 2016 when markets digested Brexit and the risk of French elections gearing up. But all-told, you've earned 5% simply owning BTPs and shorting bunds via futures. And that includes the most recent move.</span><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgOF_1lC2G5xNQBpp-41iS3gVg2WTNnODSfpFH0FrLhyphenhyphenpdaWMr0F8Y7oj56OHtXEPmeo1UlagCmDsi_Pfh74tCDoDYKo4M9xC8Qmydw5ZpEfpy6cvNJM6SuENjS9xJxdm7Qyq6V/s1600/BTP+2.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><span style="font-family: "arial" , "helvetica" , sans-serif;"><img border="0" data-original-height="357" data-original-width="602" height="378" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgOF_1lC2G5xNQBpp-41iS3gVg2WTNnODSfpFH0FrLhyphenhyphenpdaWMr0F8Y7oj56OHtXEPmeo1UlagCmDsi_Pfh74tCDoDYKo4M9xC8Qmydw5ZpEfpy6cvNJM6SuENjS9xJxdm7Qyq6V/s640/BTP+2.png" width="640" /></span></a></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Of course, that doesn't include the embedded leverage (roughly 29:1 on BTPs and 71:1 on bunds based on straight-up initial margins for both). But the key thing is, even with the huge drawdowns of the Eurzone crisis, BTPs have been a great bet for the past half decade by and large.</span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">We can also take duration right out of it. Below we show the total returns over the last 10 years for two series: the market-value weighted Italian bill index (BoTs) and returns for constant-maturity EUR LIBOR. Again: outperformance.</span><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhQ6qX0dS1BzfHWyX48VoKz-nIHz4qDAbrKUl8ggtwut1YlgxHAi5tzqM1aBG6nU3p-yLgbIUDpycsBZEI66c_CXhd7xv0pWXOPanuGGdH_heDepeQLEDQvqRPNDVrNs0pA4XWu/s1600/BTP+3.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><span style="font-family: "arial" , "helvetica" , sans-serif;"><img border="0" data-original-height="351" data-original-width="628" height="356" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhQ6qX0dS1BzfHWyX48VoKz-nIHz4qDAbrKUl8ggtwut1YlgxHAi5tzqM1aBG6nU3p-yLgbIUDpycsBZEI66c_CXhd7xv0pWXOPanuGGdH_heDepeQLEDQvqRPNDVrNs0pA4XWu/s640/BTP+3.png" width="640" /></span></a></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Skeptics will, fairly or unfairly, note that the 8% spread over bunds for 12 month BoTs back in 2011 give one heck of a tailwind for returns here. They've probably got a point.</span><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiFkW0zR8B9jXvQwsInF2omGfYXq0InCXgDZppcjDekLazvcUa1XJo_gNRvhdzGtcgOanKxZJAkQSM-yT9fBgoIVxkX5srwuKnGG0OzhlswROf95mOjTmA7L3iaLCMc7kLSlxop/s1600/BTP+5.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><span style="font-family: "arial" , "helvetica" , sans-serif;"><img border="0" data-original-height="638" data-original-width="869" height="469" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiFkW0zR8B9jXvQwsInF2omGfYXq0InCXgDZppcjDekLazvcUa1XJo_gNRvhdzGtcgOanKxZJAkQSM-yT9fBgoIVxkX5srwuKnGG0OzhlswROf95mOjTmA7L3iaLCMc7kLSlxop/s640/BTP+5.png" width="640" /></span></a></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">To mollify the starting point crowd, here's the same chart started on the last day of 2013, when spreads had sunk into their contemporary range. Again: outperformance!</span></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj5IBgEB4qf8yFzdhYNa2H_Vqq3KwqfQMCmpBr17FhzHeZvjZii2CDVgzoiYF3ZPHr3M1LF18xex6BJ4GLFmLmJhQDtd8J1MdY8V5aXpDkTKCNxClx7DJx6THzj1P01OkvrjB03/s1600/BTP+4.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><span style="font-family: "arial" , "helvetica" , sans-serif;"><img border="0" data-original-height="343" data-original-width="622" height="352" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj5IBgEB4qf8yFzdhYNa2H_Vqq3KwqfQMCmpBr17FhzHeZvjZii2CDVgzoiYF3ZPHr3M1LF18xex6BJ4GLFmLmJhQDtd8J1MdY8V5aXpDkTKCNxClx7DJx6THzj1P01OkvrjB03/s640/BTP+4.png" width="640" /></span></a></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">The answer to the question "how could you lend to Italy at negative yields" is therefore pretty plain. It's because risk premiums could only get so high, and with negative "risk free" (always a purely academic concept, but here meaning "least risky") yields elsewhere, either spreads had to be ludicrously high or nominal yields had to head below zero. Financial markets are always and everywhere a relative game, and as much as we love heuristics like "nominal yields should be positive", sometimes they don't work and there's nothing we can do about it.</span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">As it stands now, the move higher in BTP yields has been swift and frankly gnarly. But when combining the extra risk of term with the extra risk of credit over prevalent short-term "risk free" (scare quotes again) rates, BTPs now carry 2.5x the premium that bunds do, and at a lower duration and lower convexity.</span><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhlJrNE6HcYAj8B5qqUwYQ9owBDq2s1GWHVJKd7j4HWI41W6vuHV-fLOVkJdguGgF5I7Vrca3UwUT1kXJ-G0NgBu1HUhrdoj7gln2etrxoZOPHZuv8H9r1g5Eqc0XbTenuS9V2V/s1600/BTP+7.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="388" data-original-width="622" height="398" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhlJrNE6HcYAj8B5qqUwYQ9owBDq2s1GWHVJKd7j4HWI41W6vuHV-fLOVkJdguGgF5I7Vrca3UwUT1kXJ-G0NgBu1HUhrdoj7gln2etrxoZOPHZuv8H9r1g5Eqc0XbTenuS9V2V/s640/BTP+7.png" width="640" /></a></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">With all of that said, the combination of rapid shock higher on pure expectation with relatively elevated risk premiums suggests to yours truly that things are primed for reversion. How the whole Italian curve trades is going to be very much dependent on how quickly Lega and the 5 Stars hear the screamed message of "y'all are out yo' damn minds" that markets are sending. With the ECB taking down 3.5bn EUR per month in Italian debt (and now holding as much as Italian banks do, give or take), a ~3% of GDP current account surplus, and broadly stable global credit markets with just-fine-thanks growth, Italy's self-inflicted mark-to-market wounds will heal quickly should the politicians decide to heed the message they're being sent. The question is, are Messrs Salvini, Di Maio, and Conte going to get the message? If not, will one of the two parties cry "uncle" and put a halt to the bold experiment in Italian populism, or at least enough to signal that Wile E put on the breaks in advance of the cliff? Given that nobody has even introduced any legislation yet, let alone sat down across from the people that drove Our Man Varoufakis into the pages of Paris Match, there's now room to eye the risk premiums in BTPs and BoTs more jealously. Now, play us off, will you Yanis? We know <a href="https://www.youtube.com/watch?v=idx3GSL2KWs">you're down with BTP</a>.</span><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhHEyK1_6DbetRwUBLWAWuZpCgjWry8hD81r-WbWtFmmnUnaKQt6WpKJ8xFlgRlurjHWT02q_r2lGXR-PKyP1k0-8xcg3-xbfAqLKQwppvwf-aDht2M_U9v0Iq2DanWg_vk00pt/s1600/Yanis.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="394" data-original-width="600" height="420" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhHEyK1_6DbetRwUBLWAWuZpCgjWry8hD81r-WbWtFmmnUnaKQt6WpKJ8xFlgRlurjHWT02q_r2lGXR-PKyP1k0-8xcg3-xbfAqLKQwppvwf-aDht2M_U9v0Iq2DanWg_vk00pt/s640/Yanis.jpg" width="640" /></a></div>
<span style="font-family: "arial" , "helvetica" , sans-serif;"><br /></span>Cackalack Capitalhttp://www.blogger.com/profile/10765822411082053545noreply@blogger.com42tag:blogger.com,1999:blog-34323687.post-50078761106431733722018-05-21T04:40:00.002+01:002018-05-21T12:53:16.216+01:00Argentina: Chronicle of an IMF Bailout Foretold<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Greetings Macro Man Community--thank you to the new contributors who have done well taking up the TMM mantle. It’s great to see that the Macro Man tradition is carrying on. </span></span></div>
<b id="docs-internal-guid-2dd57b5b-80bf-fff6-335e-a97e2790e3e8" style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">This isn’t me coming out of retirement, so much as wrapping up some loose ends. My departure coincided--nearly to the day--with a firestorm in emerging markets that hasn’t quite been put out yet. A combination of local factors, higher US rates, outright USD strength, and the subsequent reversal of portfolio flows has crushed a few EM currencies like BRL, TRY and ARS. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Argentina is an especially compelling case--it was the prodigal son of emerging markets in 2017, having not only come back to the market in style, but also plugged the market in size with the famous century bond, a 100-year issue that gets financial journalists squealing with delight every time they think about it. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Fast forward to, well, only later in 2017...and Argentina started to backtrack on inflation targeting, central bank independence, free movement of capital, and was experiencing a historic drought that was crushing soybean production--the country’s biggest source of export revenue. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">It started slowly...and then as ever in EM...all at once: </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="427" src="https://lh5.googleusercontent.com/7tT_lg_Bz2_cUijKBYD4WHlhOMYCmmc8PyXDk0G9bYSMVc_FZj_ExgD3QKiY8udcgYZ8ZzNhVYIFHiDz82x5vciXSi2cr3Xgrcgm2OYTEhH5sCqw2FYo0GJCduL4ntnfyzvAsa9x" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Bang...in only a couple of weeks, the peso was 20% weaker and the central bank hiked three times in the space of a week, taking the overnight rate to 40% to stem the run on the currency. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Having written about the subject in the past, I feel compelled to look back at my work and see what I missed, what I got right, and what was simply a big surprise: </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Back in September, </span><a href="https://macro-man.blogspot.com/2017/09/argentina-think-globally-act-locally.html" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">I wrote this</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> on Argentina: </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">“</span><span style="background-color: white; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">I continue to believe global trends will buy time for Macri’s agenda to work--and while an Argentine election is always a bit of a crapshoot, the trend in Latam favors center-right candidates” </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: white; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Grade: B.</span><span style="background-color: white; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> Global trends did NOT give Macri time for his agenda to work--but he did win a big midterm in October. So I got the theme right--Macri was engaging in a risky strategy to use cheap short-term funding and not cut spending quickly, hoping growth would eventually bail him out. It didn’t work. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: white; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">“Beyond the political risk, the fiscal situation is far from healthy--and will require a bout of austerity and likely significant spending cuts. The 2017 primary balance is a nasty -4%/GDP, which means the government is going to be running up a larger debt load for the foreseeable future. “ </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: white; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Grade: A-.</span><span style="background-color: white; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> Many real money folks were simply enamoured with the story, and didn’t really check under the hood. Macri cut the deficit, but ignored his addiction to short-term financing.</span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">“</span><span style="background-color: white; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Either way, as the charts below show, an acceleration of public debt at this pace for a sub-investment grade credit is simply unsustainable….I expect Cambiemos will win in October, which should provide a short-term tailwind, but the medium-term is fraught and highly dependent on local and international factors that could throw the reform movement into a state of chaos.” </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: white; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Grade: A. </span><span style="background-color: white; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Maybe there’s a spot for me at Hacienda when Macri finally cleans house. Or a cushy consulting gig with the IMF? </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<span style="background-color: white; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">I’m feeling pretty good so far. Now, let’s talk about the currency!</span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: white; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">“Similar to the credit, this is an attractive carry trade if you buy into “the story”, but not without its risks. I think ARS will appreciate over time, but it won’t be quick.” </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: white; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Grade: D</span><span style="background-color: white; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">. I was clever enough to note the risks, and an abundance of evidence ARS had to weaken. Then had to add a throwaway line about about “ARS will appreciate over time”. I blame my editor. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: white; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Then I get into the lebac/NDF cross border trade. “The lebacs and ndf hedges mature every one to three months, so you have the opportunity to get out if the fundamentals or political situation deteriorate. That is unlikely...Long story short, at 500bps this spread is well in excess of the risk that the government will again implement capital controls over the next 3, 6, or 12 months.” </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: white; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Grade: D+.</span><span style="background-color: white; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> In classic “crystal ball” fashion, I made the forecasting assumption that Macri wouldn’t have a real mess on his hands if the economy went south. That’s what happened. Now the IMF is in town and capital controls are most certainly on the table. It wasn't just that I was wrong, I was wrong about the downside of being wrong. </span></span></div>
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<span style="font-size: large;"><span style="background-color: white; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: white; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Yet, in the end, if you followed my trade here you just might weasel away with your profits intact--and I was right that you have numerous exit doors to get your money back. You’re still up TTD, and at last check this spread is in decent shape--but there’s going to be some sleepless nights and pepto-bismol between you and maturity. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: white; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">To summarize, I think this shows that there are no easy routes to investing success. TBH, I think I got more stuff right than wrong--yet the stuff I got right here was relatively tough to monetize, and the stuff I got wrong had the potential to be a first-class ticket on the fast train to EM Crazytown that ends in a smoldering pile of twisted metal and an uber to the unemployment office. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: white; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">With that, a quick post-mortem on how Argentina got to this point, and where they may go from here. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: white; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">First is this one--not the ARS chart, but the real effective exchange rate. I alluded to this but didn’t realize just how important it was and is. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b><br />
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="431" src="https://lh5.googleusercontent.com/EzbrS0NDAVn4pNy5fgvw7zfcytctnY1VvGJMrZ7U8D2JOOs7McslHjfQF72iODlYa229RSf5j7caK7EvnoAnH9XN-zcoNR5V2fIXWe_Q8F_h6ip6jV4b_Om0LOCqJ0i3UmBPhTxY" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">You can see here that the deval the country experienced when Macri let the peso float in 2015 was enough to get back to a competitive level, but high inflation and *not high enough* interest rates let the real value of the currency appreciate back to unsustainable levels. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Hand in hand with that chart is this one: </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="352" src="https://lh4.googleusercontent.com/CQ6RowXhCcTL388kqqwItoPniULmPJWoSx3GSO5qa0loBbROuvyfGo2QwfW2A-5-w_d4YJ9cxONaBUK1V_yvEXTIArdocxNx5rHIN9jATJX-KHrcqW0bmD1yHyurOZqeEC2iEVtY" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="505" /></span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">When Macri won in 2015 the country experienced a huge increase in portfolio flows and FDI--enough to fund the budget deficit and start re-accumulating international reserves. But what else do you notice? A significant acceleration in the current account deficit. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">That’s what came back to bite them in the back--especially after the central bank backtracked on the 2018 inflation target in December and inexplicably cut the overnight rate earlier this year--two measures that slashed real interest rates and waved a red flag in front of weary local investors that now might be the time to take their money out of the country. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Then came the unpredictable. This is a chart of global soybean production, with Argentina on the bottom tile. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="432" src="https://lh4.googleusercontent.com/kxCnGmYXFIMuBOvR25PtOWN7IFo5-R-k3tqiunKRj5lOsWvYy0FlMlibw2Pth1L30EAUwfgys6uMj_Q3jhZTxuKZqwg3lduAVUq1LiUwB6ha750857UDfrKrOynBCUjLTeuuEcii" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">What you see there is a drop in production by roughly a third, which adds up to roughly $7 billion in lost export revenue </span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">just in soybeans alone</span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">. Add a couple more yards from corn and other agricultural products, and this is a pretty big event. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">This is why EM countries build international reserves, so they can use them to fund their short-term USD liabilities when times get tough or there is an unexpected hit to export revenue. That’s where Brad Sester comes in...the High Prince of International Capital Flows (I had a short debate on Twitter on this subject last week...it was an honor getting worked over by him)</span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Brad noted just how inadequate Argentina’s reserves have been, owing to not only their rapid increase in short-term debt, but also the relatively small size of the local banking sector. This chart is particularly telling: </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="412" src="https://lh5.googleusercontent.com/rkuus2Vxh7wqNcRwfOm72xvWJ3wQE6kQQQ7O5A03T41c64U3cNaX_PLzyqFT5BdQ4AUpaedAMXrWMe3-qqN0NgvM-YGAMjX2wYQu17--POSzpPw2wi8FsQa-eN3KW4sN99WAtqPx" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The spread between the dark blue lines and the top of the bars are the key. Short-term external debt and the C/A deficit were accelerating much faster than net reserves. I’d add that the government was also dependent on short-term </span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">local </span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">financing in the form of t-bills and Lebacs...from foreigners!! That doesn’t show up in these figures, but Macri eliminated all restrictions on incoming and outgoing capital in early 2017...when the economic situation got sticky this year, that hot money was looking to leave as quickly as it came. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">That culminates in this chart, which shows just what kind of figures were dealing with here. (the pathetic color crayon is my emphasis, not Brad’s) </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="397" src="https://lh4.googleusercontent.com/fg9U-SrvhEbQIZfyX64nS03EJJUYHXT6Uip7B5cD8sOu3_EF_zfM6BUq31SrBNi-0wta6xnWOd9KEbOdFbPaNiIYWMUfuYQqAbiP1Okd-JSSB81Pfwv-sg74ChzGCKZH3hB4OWyS" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">With all that, an appreciating USD, a reversal in global EM flows, and a debt-gdp level approaching 50%, you can see why Macri had to call in the IMF. I’m still not convinced that is the right political decision, but would be willing to stipulate he made a sound decision to go to them, before they came to him. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Where does that leave us in the market? Would you be surprised to hear...not very far from previous levels?!? This is a chart of the spread over UST for the Argentina 33s, a dollar bond that has been around forever. 100bps off the lows?!? 470bps over? Really? </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /><br /><br /><br /><br /><br /></span></b><br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="455" src="https://lh6.googleusercontent.com/87lLOANcYlJve2J9E-PI6vOamQx2G8QPTx8YWfC0AxxqeIKN0b2Fe4XMfkoh8t2PSrbiGjtPuI7Em3_pnY6_v8LCUwMorZ-vigHNFbxq-y7G-lmhZUXp2ei_hNbHoIy7fCbXoHBA" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Yes folks, that’s where we are in the global credit cycle. A low grade credit with a documented history of being “debt intolerant” rolls over and requests an IMF bailout AFTER A 100BP SELLOFF IN THE CREDIT. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Where does Argentina go from here? I don’t know. Part of me says they are going to pull a Houdini and get out of this mess. Another part says this is just the beginning of an ugly Greek-like cycle of austerity, reform, and the resurgence of leftist politics. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">What do I know for sure? Given the magnitude of the global credit binge, we’re going to see a lot more of this kind of thing. To avoid tough economic measures, Argentina exchanged safety and flexibility for cheap financing and fragility. All it took was a drought, a couple of bad political decisions and a 100bp selloff and it was game over. </span></span></div>
<span style="font-size: large;"><br /></span>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Argentina lost. Others will too. </span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><br /></span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Shawn</span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-family: "arial"; font-size: large;"><span style="white-space: pre-wrap;">TeamMacroMan2@gmail.com
@EMInflationista</span></span></div>
EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com30tag:blogger.com,1999:blog-34323687.post-83282011770926941472018-05-18T08:11:00.000+01:002018-05-18T08:26:24.005+01:00William Tell wake up, Switzerland has gone mad!<br />
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<tr><td class="tr-caption" style="text-align: center;"><span style="font-size: small;">William Tell contemplating SNB's portfolio</span></td></tr>
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<span style="font-size: 13.5pt; text-align: justify;"><br /></span>
<span style="font-size: 13.5pt; text-align: justify;">On June 10th, Swiss voters will cast their votes on the Vollgeld
referendum: </span><span style="color: blue;"><a href="https://www.admin.ch/gov/en/start/documentation/votes/20180610/Sovereign-Money-Initiative.html" style="font-size: 13.5pt; text-align: justify;" target="_blank">"F</a><a href="https://www.admin.ch/gov/en/start/documentation/votes/20180610/Sovereign-Money-Initiative.html" style="font-size: 13.5pt; text-align: justify;" target="_blank">or crisis-safe money: Money creation by
the National Bank only! (Sovereign Money Initiative)."</a><span style="font-size: 9.5pt; text-align: justify;"> </span></span><br />
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<div style="margin: 0cm 0cm 0.0001pt; text-align: justify;">
<span style="font-size: 13.5pt;"><br /></span></div>
<div style="margin: 0cm 0cm 0.0001pt; text-align: justify;">
<span style="font-size: 13.5pt;">What is it about? The idea is to limit money creation to the
central bank only. That would be the end of the fractional reserve banking
system in Switzerland. This system has ruled the global financial system since
the 17th century. Fractional reserve banking allows that only a fraction
of deposits held by banks are backed by central bank money.</span></div>
<div style="text-align: justify;">
<span style="font-size: 18px;"><br /></span></div>
<span style="font-size: 13.5pt;"></span><br />
<div style="text-align: justify;">
<span style="font-size: 13.5pt;"><span style="font-size: 13.5pt;">The proponents of the referendum want to avoid another 2008 like bank bailout
and argue that: " [...]under the 100% reserve system the central bank
wouldn’t have complete control over the money supply, while it would under a
sovereign money system. Further, under a 100% reserve system the possibility of
a bank-run or the government having to rescue a bank is not completely
eliminated, whereas it would be under a sovereign money system.”. To
control money creation the central can: "[...] to keep the amount of money
in circulation stable or inject, the Swiss National Bank will need to
re-introduce this money into the economy. It can do this in one of several
ways: - by buying assets such as securities or foreign exchange reserves (as it
can now) - by lending money directly to banks - by handing debt-free money
directly to the government to be spent back into circulation or to reduce taxes
or to be given directly to citizens.". These statements, coming from the </span><a href="https://www.vollgeld-initiative.ch/fa/img/English/2017_05_02_Referendum_on_Sovereign_Money_in_Switzerland.pdf" style="color: black; font-size: 13.5pt;" target="_blank"><span style="text-decoration-line: none;">vollgeld paper</span></a><span style="font-size: 13.5pt;"> have severe
drawbacks, we will look at them later.</span></span></div>
<span style="font-size: 13.5pt;">
</span>
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<div style="text-align: justify;">
<span style="font-size: 18px;"><br /></span></div>
<span style="color: black; font-size: 13.5pt;"></span><br />
<div style="text-align: justify;">
<span style="color: black; font-size: 13.5pt;"><span style="font-size: 13.5pt;">If this referendum were to succeed that would be a jump into the unknown. It
would represent a complete change of Swiss banks business model and it would have
massive consequences for the Swiss economy. Some figures will help put this in
perspective: Swiss banks provide loans worth 2 times GDP; the financial sector
is about 10% of GDP and employs 5% of the labor force.</span></span></div>
<span style="color: black; font-size: 13.5pt;">
<o:p></o:p></span>
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<span style="color: black; font-size: 13.5pt;">Some will say it is not that
easy to pass a referendum, the yes must get more than 50% of the votes at
the national level plus win in a majority of the 26 Cantons. Moreover, a recent
poll by gfs.bern shows No at 49%, Yes at 35% and Undecided at 16%, one out today from Tamedia shows No at 54%, Yes at 39%, Undecided at 7%.<o:p></o:p></span></div>
<div style="margin: 0cm 0cm 0.0001pt; text-align: justify;">
<span style="color: black; font-size: 13.5pt;">It's not because something has a low chance of happening that it
must be discarded completely especially given the consequences are so asymmetric.<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div style="margin: 0cm 0cm 0.0001pt; text-align: justify;">
<span style="font-size: 13.5pt;">The Swiss institutions (Confederation, SNB, Banks...) and most of
the academics (a great paper from Philippe Bachetta can be found <a href="https://www.swissbanking.org/de/medien/statements-und-medienmitteilungen/vollgeldinitiative-studie-zeigt-folgen-fuer-die-schweiz/the-sovereign-money-initiative-in-switzerland-an-assessement.pdf" target="_blank"><span style="color: blue; text-decoration: none;">here</span></a>) oppose the referendum initiative. I
do share their arguments and will try to summarize them below.<o:p></o:p></span></div>
<div style="margin: 0cm 0cm 0.0001pt; text-align: justify;">
<br /></div>
<div style="margin: 0cm 0cm 0.0001pt; text-align: justify;">
<span style="color: black; font-size: 13.5pt;">The proposal would separate money and credit. It will move away
from the historical distribution of responsibilities between
the SNB and the banking system.<o:p></o:p></span></div>
<div style="margin: 0cm 0cm 0.0001pt; text-align: justify;">
<span style="color: black; font-size: 13.5pt;">The SNB will have to guarantee the supply of credit to the economy
by the financial services providers. That would have to be done via securitized
loans. The SNB will have to take credit risk and would have a more direct
influence on lending. It creates a risk of political interference and a
possible lack of competition in the banking sector. <o:p></o:p></span></div>
<div style="margin: 0cm 0cm 0.0001pt; text-align: justify;">
<span style="color: black; font-size: 13.5pt;">To be true credit risk is already present on SNB balance
sheet via its 82 bios USD equity portfolio, but this is meant to be temporary,
i.e. this is the Swiss version of a QE portfolio.<o:p></o:p></span></div>
<o:p></o:p>
<br />
<div style="margin: 0cm 0cm 0.0001pt; text-align: justify;">
<br /></div>
<div style="margin: 0cm 0cm 0.0001pt; text-align: justify;">
<span style="color: black; font-size: 13.5pt;">Sovereign money will limit liquidity and maturity transformation as
banks cannot create deposits through lending. It will restrict supply of credit
to households and small and medium size firms with no access to capital
markets. The referendum initiative does not address the too big to
fail issue as misjudgement and over lending can still exist. It does
not address the shadow banking issue either.<o:p></o:p></span></div>
<o:p></o:p>
<br />
<div style="margin: 0cm 0cm 0.0001pt; text-align: justify;">
<br /></div>
<div style="margin: 0cm 0cm 0.0001pt; text-align: justify;">
<span style="color: black; font-size: 13.5pt;">SNB will switch back to monetary targeting, that's back to the
future! Central banks all over the world moved away from it 20 years ago for
good reasons.<o:p></o:p></span></div>
<div style="margin: 0cm 0cm 0.0001pt; text-align: justify;">
<span style="color: black; font-size: 13.5pt;"><br /></span></div>
<div style="margin-bottom: .0001pt; margin: 0cm;">
<span style="color: black; font-size: 13.5pt;"><br /></span></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjEu68GoN9tLK5pi9N1pe0FbTZvth3tlJqiHfvGPYVt6ZRrZpAK4hyKGQ_2wW2L9Y1LNspmPISTwT9-mgNBOXJiAeBi72uyCTgwMxT2C5tPJsOOHvTZfnKdyCXlvo02FbxqlFxI/s1600/doc.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="420" data-original-width="731" height="366" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjEu68GoN9tLK5pi9N1pe0FbTZvth3tlJqiHfvGPYVt6ZRrZpAK4hyKGQ_2wW2L9Y1LNspmPISTwT9-mgNBOXJiAeBi72uyCTgwMxT2C5tPJsOOHvTZfnKdyCXlvo02FbxqlFxI/s640/doc.jpg" width="640" /></a></div>
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<span style="color: black; font-size: 13.5pt;"><br /></span></div>
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<span style="color: black; font-size: 13.5pt;"><br /></span></div>
<div style="margin-bottom: .0001pt; margin: 0cm;">
<span style="font-size: 13.5pt;">Sovereign money would be created “debt-free” rather than through
SNB money market operations (purchasing securities or granting secured loans).
It's not clear how money supply would be reduced when needed to. It
creates a huge uncertainty for the Swiss economy.<o:p></o:p></span></div>
<br />
<div style="margin-bottom: .0001pt; margin: 0cm;">
<span style="font-size: 13.5pt;">One of the problem with the underlying idea of money targeting is
that is there is no historical link between money creation and credit
provision.<o:p></o:p></span></div>
<div style="margin-bottom: .0001pt; margin: 0cm;">
<br /></div>
<div style="margin: 0cm 0cm 0.0001pt; text-align: center;">
<span style="font-size: 13.5pt;">M1 and Total Credit per GDP<o:p></o:p></span></div>
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</div>
<div style="margin: 0cm 0cm 0.0001pt; text-align: center;">
<span style="font-size: 13.5pt;"> (The Sovereign Money Initiative in Switzerland: An
Assessment Philippe Bacchetta, June 2017)<o:p></o:p></span><o:p></o:p></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi1Z0ieUH1d34IoUGBsvQ1frZ-8JkAoN-cAq2IvPKRpY-CalKnG81z7m4Ro1FJ5RyZDBXuGf9ND_CGvYHbz7Gx2zoBpQfuTNZ82eIsa8BcqfWWoDVRjwoFIOBrwi3cUPG0K-aNN/s1600/ggg.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="446" data-original-width="584" height="488" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi1Z0ieUH1d34IoUGBsvQ1frZ-8JkAoN-cAq2IvPKRpY-CalKnG81z7m4Ro1FJ5RyZDBXuGf9ND_CGvYHbz7Gx2zoBpQfuTNZ82eIsa8BcqfWWoDVRjwoFIOBrwi3cUPG0K-aNN/s640/ggg.png" width="640" /></a></div>
<div style="margin-bottom: .0001pt; margin: 0cm;">
<span style="font-size: 13.5pt;"><br /></span></div>
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<span style="color: black; font-size: 13.5pt;"><br /></span></div>
<div style="margin-bottom: .0001pt; margin: 0cm;">
<span style="font-size: 13.5pt;">The other problems lie in the implementation of the change. </span></div>
<br />
<div style="margin-bottom: .0001pt; margin: 0cm;">
<span style="font-size: 13.5pt;">As banks will transfer their customer's sight deposits to the SNB,
they end up with a financing gap. Sight deposits minus reserves represent 25% of
credit and 15% of banks’ balance sheets. The Vollgeld paper sees it
happening in 2 steps:<o:p></o:p></span></div>
<div style="margin-bottom: .0001pt; margin: 0cm;">
<span style="font-size: 13.5pt;">1- SNB lends its reserves to fill the financing gap.<o:p></o:p></span><o:p></o:p></div>
<div style="margin-bottom: .0001pt; margin: 0cm;">
<span style="font-size: 13.5pt;">2- Banks need to find alternate sources of financing. <o:p></o:p>It
can borrow money from the Swiss National Bank, it can borrow from other banks,
it can incentivize customers to place their money in savings accounts, it
can issue shares or bonds.<o:p></o:p></span></div>
<div style="margin-bottom: .0001pt; margin: 0cm;">
<br /></div>
<div style="margin-bottom: .0001pt; margin: 0cm;">
<span style="font-size: 13.5pt;">It is not guaranteed that the new sources of funding will be more
stable than the old client sight deposits. We could see an increase in savings
deposits or Euro sight deposits which are not part of sovereign money. It
could lead to an increase in Euros transactions in Switzerland! We could see a
switch to short term funding which is more volatile. <o:p></o:p></span></div>
<div style="margin-bottom: .0001pt; margin: 0cm;">
<span style="font-size: 13.5pt;">Given sovereign money is a safe asset outside the banking sector,
it will not take much for these funding sources to leave banks in time of crisis.
Thus, the risk of bank runs is not reduced at all.<o:p></o:p></span></div>
<div style="margin-bottom: .0001pt; margin: 0cm;">
<br /></div>
<div style="margin-bottom: .0001pt; margin: 0cm;">
<span style="font-size: 13.5pt;">Let's now have a look at the economic impact.<o:p></o:p></span></div>
<div style="margin-bottom: .0001pt; margin: 0cm;">
<br /></div>
<div style="margin-bottom: .0001pt; margin: 0cm;">
<span style="font-size: 13.5pt;">As stated by Phillippe Bacchetta, the impact in the current state
of negative rates would be very low. But... If normal positive rates were to
come back, the impact can be up to <b><u>-0.8%/annually</u></b>.
This cost would be borne out by households and banks, it should be seen as a
lower-bound, as other costs (implementation, regulation costs etc) are
most difficult to assess.<o:p></o:p></span><br />
<span style="font-size: 13.5pt;"><br /></span>
<span style="font-size: 13.5pt;">What would be the market implications? According to Beat Siegenthaler at UBS, the CHF could appreciate as this would be seen as a road to tighter credit and restrictive monetary policy. The SNB might also argue it is not anymore allowed to intervene in the FX market. I'm not so sure about this outcome, I guess bank stocks would be hurt pretty badly as their profitability will be curtailed and the high uncertainty surrounding their replacement funding. Given this is an idiosyncratic issue, and the fact the SNB argument is contradicted by the Vollgeld paper I have a hard time to see CHF rally. </span></div>
<div style="margin-bottom: .0001pt; margin: 0cm;">
<br /></div>
<div style="margin-bottom: .0001pt; margin: 0cm;">
<span style="font-size: 13.5pt;">As the Philippe Bacchetta puts it “It is to be hoped that all these costs and
potential risks will be all well understood by Swiss voters.” <o:p></o:p></span></div>
<div style="margin-bottom: .0001pt; margin: 0cm;">
<br /></div>
<div style="margin-bottom: .0001pt; margin: 0cm;">
<span style="font-size: 13.5pt;">There are numerous examples in recent history of why a very technical
project should not be put to referendum, people will mostly vote to voice their
concerns and fears rather than making an educated choice on the question
asked. <o:p></o:p></span></div>
<div style="margin-bottom: .0001pt; margin: 0cm;">
<span style="font-size: 13.5pt;">There is a snowball chance in hell that people will dig deep
enough to get a thorough understanding of this technical issue. </span></div>
<div style="margin-bottom: .0001pt; margin: 0cm;">
<span style="font-size: 13.5pt;"><br /></span></div>
<div style="margin-bottom: .0001pt; margin: 0cm;">
<span style="font-size: 13.5pt;">The
current wave of populism makes me very nervous as to the outcome of this
referendum. I hope the Swiss are immune to it.<o:p></o:p></span></div>
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<span style="font-family: "times new roman" , serif; font-size: 13.5pt; line-height: 107%;">MacroDiver<o:p></o:p></span></div>
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<br />Anonymoushttp://www.blogger.com/profile/05759305433915605860noreply@blogger.com262tag:blogger.com,1999:blog-34323687.post-36181164632275534892018-05-02T13:20:00.001+01:002018-05-02T13:20:51.542+01:00Strong And Stable, Valuations Edition<span style="font-family: "arial" , "helvetica" , sans-serif;">It's fun and trendy to point out valuations are elevated for a variety of financial assets these days, though thanks to the global bond market selloff over the last several months all manner of fixed income is showing some honest-to-goodness yield again. For the equities crowd, the "P/E" of the 10 year note (1/yield) is down to its lowest levels since 2011. It's a similar story for the broader Barclays Agg, the widely-followed aggregate for the fixed rate investment grade taxable bond market.</span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">So are equity valuations down to? Why, in fact, yes they are! Thanks to a weaker dollar, stronger US and global growth, and of course tax reform, since the end of 2017 next 12 month estimated earnings are up over 11%, while valuations have dropped 2.2x to 16.2x those next 12 months' estimated earnings for the index. </span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">We can already hear the hoots of derision at the very idea of using analyst estimates. Calm down, folks, we aren't going to litigate that and we have to use <i>some </i>forward-looking estimate of earnings, so we'll go with that one for now. Analyst earnings are always and everywhere acceptable as a baseline, in this correspondent's view, and can create respectable set-ups to play the contrarian of course. But generally they're a decent way to capture a reasonable expectation of what happens next.</span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Okay so with that off our chest, we'll ask the question: is the US equity market <i>really</i> overvalued? The 16.2x valuation is pretty aggressive versus the ~11x forward earnings being priced in back in the dark days of autumn 2011, but they're hardly unprecedented. Buying ~16x forward earnings in late 2014 has delivered ~8-9% annualized price returns since, and 16.2x isn't that far from mid-2009 forward valuations. We of course don't need to be explicit about how that turned out for equity investors!</span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">But, but! Isn't the US expensive versus the rest of the world? Sure, that's reasonable. We pulled data for a few different MSCI indices; this isn't a comprehensive sample but should give a rough idea. At 16.39x next 12 month estimated earnings, the US trades at a healthy premium. The MSCI World index trades about a turn lower at 15.42x while Europe enjoys a robust 2+ turn discount at 14.31x. High-growth EM is down at 14.09x, while China (still growing in the mid-single digit range real, give or take some fudging here or there) is 12.30x (note: MSCI China is all H-shares listed in Hong Kong).</span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">The problem is that the US is relatively unique. Sticking with the MSCI indices, Tech's market cap is over 24% of total US market cap versus 16.2% for MSCI World. For EM, that's only 7.1%. Given gangbusters growth, it's pretty reasonable for US Tech to trade at a healthy forward multiple, 17.31x next 12 months' earnings. But wait: <i>MSCI World</i> Tech trades richer than that, at 17.53x! If you want to pay really exorbitant prices for forward earnings in Tech, head across the pond where the MSCI Europe Tech sector trades 20.6x next 12 months' earnings. EM Tech is valued at a similar level. So the US is expensive in aggregate, but its biggest sector actually looks pretty cheap!</span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">This was recently explored in a good post by <a href="http://www.fortunefinancialadvisors.com/blog/how-differences-in-composition-distort-market-valuation-differences">Lawrence Hamtil</a>. [We also note @modestproposal1 as a <a href="https://twitter.com/modestproposal1/status/552488882512855040">frequent</a> <a href="https://twitter.com/modestproposal1/status/543815447242895360">contributor</a> to this theme.] The key thing here is that if we want to explore differences in valuations, it behooves us to adjust for the differing sectors; it makes <i>perfect sense</i> for an all-Utilities index to trade at a big discount to an all-Tech index. That's a pretty extreme example, but the intuition should be clear: higher growth should be valued more dear, and the more growth stuffed into an index the more we should be willing to pay for it.</span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">To get things all nice and squared away, we adjusted the MSCI indices from the chart above to get to a nice like-for-like comparison where they all have the same sector weights both now and across time. The US multiple has actually gone up slightly, but so has everywhere else! Except for Australia, everyone else is within 3 turns now, and there's very little daylight between the MSCI World (third-highest) and Canada (lowest). The US still looks expensive, and in a certain sense stands out, but alternatives are all tightly grouped instead of dispersed. </span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">We're missing one other dimension here. In the charts below we show the next 12 month P/E, adjusted to global sector weightings, for the US, Europe, Japan, China, and EM. The US always retains a premium, but the re-weighting shows that the US investors have actually been quite discerning. At global weights, they've been unwilling to pay more than 19x forward earnings through a variety of market environments. US valuations have been high, but very stable...unlike the rest of the world. </span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Our last chart below shows the current percentile of next 12 months earnings multiple for the MSCI indices we've been discussing. Once again, it's pretty hard to look at the US market as ridiculously over-valued. While valuation is certainly elevated, it's been higher about 30% of the time; Europe looks worse by this metric, as do Emerging Markets. Canada and Japan are relatively cheap versus recent years.</span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Valuation isn't everything. Many punters - especially those in the post-GFC world - have seen margin incinerated on the backs of "high P/E, gotta mean revert" trades. One of the most famous mean reversion advocates <a href="https://www.ft.com/content/cd516726-46d8-11e7-8d27-59b4dd6296b8">folded</a> last year, and for once that sort of about-face didn't mark a major top for a trade. Therefore in our view there isn't much to do here other than to argue <i>there isn't</i> a trade. Sometimes capital saved by not following popular memes is capital earned, to say nothing of the abject frustration of incinerated options <a href="https://www.wsj.com/articles/a-stock-permabear-wont-give-in-1504576920">premium</a>.</span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Note: all data for this post is via Bloomberg/author's calculations, value date 4/30/18.</span>Cackalack Capitalhttp://www.blogger.com/profile/10765822411082053545noreply@blogger.com165tag:blogger.com,1999:blog-34323687.post-7379882985344300352018-04-27T06:16:00.000+01:002018-04-27T06:16:41.339+01:00EFF-IOER: What's Next?<br />
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<span style="font-family: inherit;">Same as Cackalack Capital, this is my first post. I joined the troops after MM asked for some<span style="color: blue;"> </span></span><a href="http://macro-man.blogspot.sg/2018/04/help-wanted_13.html" style="font-family: inherit;"><span style="color: blue;">help</span></a><span style="font-family: inherit;">. I am </span>honoured<span style="font-family: inherit;"> and thrilled to get the chance at it. Please feel free to contact me with any questions, comments, ideas at <a href="mailto:macrodiver1@gmail.com">macrodiver1@gmail.com</a>.</span></div>
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<span style="font-family: inherit;">Alongside the wild ride in Libor-OIS, which was the subject of a <a href="http://macro-man.blogspot.sg/2018/04/lois-maximus.html" target="_blank"><span style="color: blue;">Cackalack</span></a> post, something on my radar and somewhat less discussed, apart from some short end nerds like myself, is the narrowing of the EFF-IOER </span>spread <span style="font-family: inherit;">( Effective Fed Funds -Interest Rate on Excess Reserves) . </span><br />
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<span style="font-family: inherit;">For almost all of 2017 that spread was at 9 bp. Then coming
into the FOMC December 2017 meeting it started to tighten. Of course this is moving at a
snail pace but a move from 9 bp to 5 bp in about 4 months for something that
didn’t move for 18 months prior to that is entitled to raise a few
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Some would say the Fed started shrinking its balance
sheet in October last year and this is draining </span>reserves,<span style="font-family: inherit;"> putting upward pressure on the Fed Funds rate. That's true but... In October excess reserves were 2.12 Tn, in December it was 2.19 Tn, so this explanation doesn't hold for the December move. It now stands at 1.99 Tn, it’s starting to bite and will more so in the future as the balance sheet reduction accelerates (see graph below). </span></div>
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<span style="font-family: inherit;">Another culprit could be the </span>diminishing<span style="font-family: inherit;"> weight of the standard FDIC assessment charge but here </span>again<span style="font-family: inherit;"> we are talking pennies. The weighted average was 4.4 bp in Q2 17, 4.2 bp in Q3 17, we don't have the numbers for Q4 yet but even tough banks capital improvement will drive it lower it's unlikely to be the catalyst.</span></div>
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<span style="font-family: inherit;">What about Bills and Bonds issuance ? As we can see from the chart below, the Treasury cash </span>balance<span style="font-family: inherit;"> started to move up in December and has </span>been<span style="font-family: inherit;"> on an accelerating path since then. This is due to the large Bill issuance that started then and </span>accelerated<span style="font-family: inherit;"> after the US budget was voted in early February. It is now sitting at 414 bios, over the </span>Treasury<span style="font-family: inherit;"> projection of 360 bios for end of June, certainly aided by this month tax receipts inflows. </span></div>
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<span style="font-family: inherit;">The Bill issuance is also draining reserves and alongside the </span>increasing<span style="font-family: inherit;"> Bond issuance it has an other side effect. It creates upside pressure on GC overnight repo rates. As a proxy I'm using the GCF Index as longer history for SOFR and BGCR are not yet available. As we can see below the 5days moving average GCF - IOER spread has tightened from -7 to +1 in the last 2 months. A correlation with Tbill outstanding seems to exist. This is changing the relationship between the various </span>overnight<span style="font-family: inherit;"> rates and in my view is the main driver behind the move higher in Fed Funds.</span></div>
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This month the Treasury has slowed down Bill issuance due to the tax receipt inflows but they will ramp it up again in May. The Fed has also increased the passive balance sheet reduction from 20 bios to 30 bios/month at the beginning of April (it will be 40 bios from July and 50 bios from October). This 2 factors let me believe the Effective Fed Funds Rate has not finished its march higher and we could see it getting nearer the IOER rate in the coming months.<br />
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Good luck,<br />
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MD</div>
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Anonymoushttp://www.blogger.com/profile/05759305433915605860noreply@blogger.com22tag:blogger.com,1999:blog-34323687.post-10276474481820456352018-04-26T03:52:00.002+01:002018-04-26T11:20:45.763+01:00LOIS Maximus<span style="font-family: "arial" , "helvetica" , sans-serif;">Since this is my first post, hello! In the words most commonly used during the reign of Mike Francesa on WFAN, <a href="https://www.youtube.com/watch?v=Ie1a9uyPjw0">long time first time</a>. I've agreed to do some posts since MM <a href="http://macro-man.blogspot.com/2018/04/help-wanted_13.html">hung up the shingle</a> a couple weeks ago, and am thrilled to be getting the chance at it. Please feel free to reach out to me at the following addresss with any questions, comments, concerns, or otherwise: <span style="background-color: white;">cackalackcap@gmail.com.</span></span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="background-color: white;">Today we'll be returning to the wonderful world of STIRs, and specifically the now-falling LOIS spread. This has been dealt with a number of times lately by Jurofalco ("<a href="http://macro-man.blogspot.com/2018/03/an-exercise-in-connecting-dots-libor.html">An Exercise In Connecting The Dots</a>") and Shawn ("<a href="http://macro-man.blogspot.com/2018/03/the-anatomy-of-libor-panic-new-wides.html">The Anatomy of a LIBOR Panic</a>" and "<a href="http://macro-man.blogspot.com/2018/03/why-is-libor-moving-higher.html">Why Is LIBOR Moving Higher</a>"). I'll assume given that background readers are basically familiar with the story.</span></span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="background-color: white;">Since peaking on April 6th at 59.6 bps, the 3m LIBOR-OIS spread has slipped below 55 bps. That date is a nice, convenient trading week following the close of Q1, a date we think is significant. In the prior recent LOIS blowout, spreads peaked out just before an October 14th 2016 deadline for new fund rules which forced huge rotation out of prime funds and into government backed funds.</span></span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="background-color: white;">This time, it's not a question of money market funds. Instead, as the prior posts detailed, the catalyst has been less clear but there's broad consensus that tax reform has played a huge role. Included in the year-end tax cut for US corporates was a provision that incentivized repatriation of offshore cash, specifically 15.5% on all offshore income rather than the previous 35% rate when repatriated; a lighter 8% levy applies for illiquid assets but the 19.5% lower rate for cash/cash equivalents is the key thing here. As a result of that repatriation, there have been a wave of announcements around what companies will do with that cash and other benefits from the tax cut. </span></span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="background-color: white;">That all sounds boffo for USD! Unfortunately, it's not that simple. Offshore assets were offshore on paper only. For instance, see <a href="https://www.bloomberg.com/news/articles/2017-05-04/apple-buys-more-company-debt-than-the-world-s-biggest-bond-funds">the tale of Braeburn</a>, Apple's Reno, Nevada-based <strike>credit mutual fund</strike> corporate treasury operation. Profits earned abroad weren't kept in local currency, but instead sold into USD and held in accounts invested in USD. So buying USD on a repatriation thesis didn't work out so well. But the investment of those USD assets is where LIBOR comes in.</span></span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="background-color: white;">It might be helpful to look at this visually. The chart below shows the share of US corporate assets sitting in liquid low risk assets (time/savings deposits, checkable deposits, money market funds, UST, Agencies, munis, mutual funds, and foreign deposits). Since the start of the current phase of US corporate-lead globalization, the share has nearly doubled. Short term interest rate assets only (time/savings deposits, checkable deposits, foreign deposits, and money market funds) have seen similar increases.</span></span><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhfqrX5jZC64k6s5hh9l4miVu_qEGmpUPvO0tj3N9D6xTTJVKRT2fd36e2zSS0odfTcdmVpKQ5IXEYXX6ev6pVtgaURU6e1__qHAToU9sqRBlRfBH86r43ZulR_oy-jHswGz5J9/s1600/042518+MM+4.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><span style="font-family: "arial" , "helvetica" , sans-serif;"><img border="0" data-original-height="406" data-original-width="686" height="378" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhfqrX5jZC64k6s5hh9l4miVu_qEGmpUPvO0tj3N9D6xTTJVKRT2fd36e2zSS0odfTcdmVpKQ5IXEYXX6ev6pVtgaURU6e1__qHAToU9sqRBlRfBH86r43ZulR_oy-jHswGz5J9/s640/042518+MM+4.png" width="640" /></span></a></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="background-color: white;">In effect, the US tax system has created an incentive for big chunks of cash to sit "offshore" in low risk investments. At the same time, the offshore market has lapped up that dollar funding. Now, in a one-off shock, that dollar funding (or at least, a large chunk of it) has headed out the door. Eventually, it will work its way back into the financial system, but probably not in the same way. With Q1 now in the books, and the biggest marginal flow of the stock of offshore dollar assets finished flowing out, rates are now reversing. That's visible in both the LOIS spread (offshore dollar deposits) and the CP-OIS spread.</span></span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="background-color: white;">There's one more piece to this story. FTAV has done a good job <a href="https://ftalphaville.ft.com/2018/03/23/1521832181000/Cross-currency-basis-feels-the-BEAT/">covering</a> Credit Suisse's Zoltan Poszar's <a href="https://plus.credit-suisse.com/rpc4/ravDocView?docid=V7btnA2AN-VHSK">theory</a> that specific provisions of tax reform are resulting in a shift in behavior for international banks' New York branches. This theory suggests those branches will shift from borrowing parent company cash to funding with commercial paper, and that repatriated cash will then be lent out via parent companies in the FX swap market (or, alternatively, those parent companies will need less USD borrowing via FX swaps because they now have USD funding back). Under this theory, commercial paper issuance by foreign branches should be rising, while the amount due to foreign offices from those branches should be falling. Instead, on a net basis, the amount due is going up.</span></span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">There's an argument about gross flows here to be made, but for now, keeping things as simple as possible, if tax changes are forcing US branches of foreign banks to reduce funding from the home office and replace it with CP, it seems unlikely that net liabilities to foreign offices would be rising sharply. The second leg also doesn't make much sense when taking a look at the data. Foreign commercial paper outstanding is up a paltry $13.5bn since the end of Q3, hardly the stuff of massive funding market shifts!</span><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgVCvkYtqswL3r_F6SRRvbVwyV67mIQlyACvc752325irNRRJ-GGbzNerdrP1Lkrraukrp6Cd94v188cYhD5vxXlqayy-4vMJKaS1XlFYybau6Ic7phBjEA4pkkxEHL7iVKENb8/s1600/042518+MM+7.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><span style="font-family: "arial" , "helvetica" , sans-serif;"><img border="0" data-original-height="402" data-original-width="680" height="378" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgVCvkYtqswL3r_F6SRRvbVwyV67mIQlyACvc752325irNRRJ-GGbzNerdrP1Lkrraukrp6Cd94v188cYhD5vxXlqayy-4vMJKaS1XlFYybau6Ic7phBjEA4pkkxEHL7iVKENb8/s640/042518+MM+7.png" width="640" /></span></a></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="background-color: white;">So, takeaways. The argument we're making here is that LOIS's spike isn't going to lead to a permanent plateau. Similar to money market reform, it was a one-off event that the market had to digest. Changes in US tax law haven't created a permanent spread between LIBOR and Fed funds, but did create a lot of selling pressure for a while. Barring new marginal widening pressures like a large spike in credit spreads more broadly, LOIS should contract considerably from here. </span></span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="background-color: white;">The easiest trade to would be to receive LIBOR versus OIS swaps, or own ED contracts versus forward OIS. If you're not able to avail yourself of the OIS market, an easier to execute version would be to own ED futures versus Fed Funds futures. As shown in the chart below, these are respectable proxies for spot LOIS, though of course they're not <i>exactly</i> the same thing. Assuming (perhaps too optimistically) a very rapid unwind of the LOIS spike, the June Eurodollar contract (M8, which has a valuation date of June 18th) should settle close to 25 bps tighter versus the average of the July (N8) and August (Q8) Fed Funds futures. A less aggressive approach would be to receive the September Eurodollar (U8) versus October (V8)/November (X8) Fed Funds futures. That gives more time for the spread to tighten, but the spread is already closer to its pre-blow out levels of ~20 bps. Because EDs trade with a DV01 of $12.50/tick and Fed Funds trade $20.835/tick, actual execution would be long 4 EDM8 versus short 1 each FFN8 and FFQ8 (or the later maturity, outlined previously). The best case for either version would be a move to 20-25 bps, with stops of 50 bps (EDM8) or 42 bps (EDU8) give-or-take. If held right to "maturity", the whole thing should be sold in the days before EDM8 or U8 cash-settle, to save a load of headaches.</span></span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="background-color: white;">Astute readers will note that we're sort of cheating here; Eurodollars mature to the value of LIBOR over a 3 month period, but we're only using Fed Funds futures for 2 months. Unfortunately, the value dates, maturity, and mechanics of the two different futures contracts don't work out exactly, so barring some might specific hedge ratios this is just the most efficient way we can see to put on a LOIS tightener using generic futures. Do get in touch if you're aware of an alternative!</span></span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="background-color: white;"><b>Edit</b>: An astute reader has pointed out that to get a perfect hedge ratio of $125 DV01 per leg (technically $125 ED and $125.01 FF) you would need to buy 10 EDs for every 3 of each FF (6 total), versus the 4:(1+1) ratio advocated above. That is correct, and if you want to add the extra size, it's probably the best way to go about it.</span></span>Cackalack Capitalhttp://www.blogger.com/profile/10765822411082053545noreply@blogger.com20tag:blogger.com,1999:blog-34323687.post-19841312082679709952018-04-25T19:37:00.002+01:002018-04-27T17:07:40.939+01:00One Sour Kiwi: Yours! On Another Clip of NZDAs we have discussed in the past, the dollar is finally bottoming. Perhaps the market is finally starting to care about real yield differentials again.<br />
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If you thought this dollar move "has legs" to run, what should you short on the other side of the dollar?<br />
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I think NZD is a prime candidate to be short.<br />
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<b><i>For those "big picture" and "picture only" people</i></b><br />
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Let's be lazy and consult the big picture charts - looking at both the weekly and monthly.<br />
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On the weekly, we've consolidated since the beginning of the year and look like its ready to run to the downside to at least a 66 handle, or maybe even a 0.62 handle. In the meanwhile, the monthly chart right now reminds me of what materialized in 1999 to 2000.<br />
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<b><i>Fundamentally, why is the Kiwi no longer sweet?</i></b><br />
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Looking under the hood, I have identified potential fundamental drivers behind this chart.<br />
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NZD/USD (and pretty much NZD/anything else) was so strong back in 2013/2014 because RBNZ was the only central bank raising rates to combat inflation post rebuild for the Christchurch earthquake.<br />
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That placed the RBNZ on a slightly different policy cycle versus the rest of the G10 world. Since we are looking at NZD/USD specifically let's just focus on the RBNZ vs the Fed.<br />
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So the Fed now is raising rates with the US economy ripping while the opposite is occurring in New Zealand.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEicY5lA9pY_GvvchSTV46hDUZnoxFzUxjudoNLPCiOjD9xSCcF27ysqhozG46IH4JiindAPrYkPas0NaqLQOX8Gxnr3DQt1PFGdj4pbV9bNP7fc8jhytVa08a38ona64Ug70Htx/s1600/20180424+US+vs+NZ+GDP.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="617" data-original-width="1012" height="390" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEicY5lA9pY_GvvchSTV46hDUZnoxFzUxjudoNLPCiOjD9xSCcF27ysqhozG46IH4JiindAPrYkPas0NaqLQOX8Gxnr3DQt1PFGdj4pbV9bNP7fc8jhytVa08a38ona64Ug70Htx/s640/20180424+US+vs+NZ+GDP.PNG" width="640" /></a></div>
<br />
<br />
Most recently, the Kiwi sold off for the most part before, around and after their prime minister election. The weakness in the NZD was very real as it mostly coincided with a general USD sell-off.<br />
<br />
Nonetheless, during her first 6 months, Jacinda Ardern has proven to be centrist enough for the NZD to benefit. In addition, the continued decline in USD also boosted NZD/USD levels.<br />
<br />
<br />
<b><i>A sour future</i></b><br />
<br />
At this juncture, the market should understand these dynamics mentioned above. So what can we look forward to?<br />
<br />
Well, first I personally believe the <a href="http://macro-man.blogspot.com/2018/03/major-europe-fx-pairs-on-precipicethe.html"><span style="color: blue;">USD is bottoming for the tradeable future as noted previously</span></a>. So there's that. For the sake of this argument, let's just assume the USD bottom and US real yields march higher.<br />
<br />
Now, moving on to the NZD side, we've started to see some of the Jacinda Ardern influence on the RBNZ. Ultimately, she is from the Labour party and her leanings to the left will be the driver for a lower NZD.<br />
<br />
<blockquote class="tr_bq">
<div style="background-color: white; border: 0px; color: #444444; font-family: "Open Sans", serif; font-size: 15px; font-stretch: inherit; font-variant-east-asian: inherit; font-variant-numeric: inherit; line-height: 1.6; margin-bottom: 15px; outline: 0px; padding: 0px; vertical-align: baseline;">
[Jacinda Ardern] says GDP per capita is "barely growing" and unemployment is stuck at 5% but she says it should be below 4%.</div>
<div style="background-color: white; border: 0px; color: #444444; font-family: "Open Sans", serif; font-size: 15px; font-stretch: inherit; font-variant-east-asian: inherit; font-variant-numeric: inherit; line-height: 1.6; margin-bottom: 15px; outline: 0px; padding: 0px; vertical-align: baseline;">
This is because, she says, the economy has become more geared toward speculation and extraction than value-added exports.</div>
<div style="background-color: white; border: 0px; color: #444444; font-family: "Open Sans", serif; font-size: 15px; font-stretch: inherit; font-variant-east-asian: inherit; font-variant-numeric: inherit; line-height: 1.6; margin-bottom: 15px; outline: 0px; padding: 0px; vertical-align: baseline;">
"Low wages aren’t simply a problem for low-wage workers, they are a problem for businesses and the economy."</div>
<div style="background-color: white; border: 0px; color: #444444; font-family: "Open Sans", serif; font-size: 15px; font-stretch: inherit; font-variant-east-asian: inherit; font-variant-numeric: inherit; line-height: 1.6; margin-bottom: 15px; outline: 0px; padding: 0px; vertical-align: baseline;">
Ms Ardern says under a Labour/NZ First government, "we can finally have fair wages."</div>
</blockquote>
From <a href="http://www.ozynews.com/2017/10/25/jacinda-ardern-says-unemployment-should-be-below-4/"><span style="color: blue;">that article</span></a> excerpt, it is painfully evident that she wants full employment and wage inflation - ya know, kind of your typical cornerstones for high levels of inflation. I talked about this before in an AUDNZD post, but I think the market is finally catching onto this as well.<br />
<br />
As predicted, to achieve this, the RNBZ will be the main vehicle. The incoming RBNZ governor has signed off on a new policy objective of caring about full employment along with inflation target. Although <a href="https://www.reuters.com/article/us-newzealand-rbnz-policy-agreement/incoming-rbnz-chief-signals-no-change-in-bias-after-employment-added-to-mandate-idUSKBN1H1101"><span style="color: blue;">he has stated there will be no change in policy bias</span></a>, I'm not convinced.<br />
<br />
With inflation still running on the low side of the central bank's target 1 to 3 percent range, my logic tells me there will not be rate increases coming out of the RBNZ for awhile.<br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjQ0FPvIM7u6QphyphenhyphenH5nS0t811ux9IqEYpCpvl2TJHphEVFVSQgS9u5SW9X-7xccGOGpOmTwFMkiL_1FjPogWD6OA_G5IJjKA3EPoOhaO7ANb3TAm5UThdqeoBatqDj1g_NYJFcl/s1600/20180424+NZ+CPI+with+Forecast.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="394" data-original-width="885" height="283" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjQ0FPvIM7u6QphyphenhyphenH5nS0t811ux9IqEYpCpvl2TJHphEVFVSQgS9u5SW9X-7xccGOGpOmTwFMkiL_1FjPogWD6OA_G5IJjKA3EPoOhaO7ANb3TAm5UThdqeoBatqDj1g_NYJFcl/s640/20180424+NZ+CPI+with+Forecast.PNG" width="640" /></a></div>
<br />
In addition, Jacinda wants unemployment lower! Like 3% lows. Let's take a look.<br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjOSZ_Fr9dko0hwhjbfgyth8wEQDGGCyUUk8_NsgsFgdrqTp5VIe6bffFVYg53PRlh55aODFslQbodSXgCAeva7HVyqrTBSAKpN44i4R3iyLuOG4Exsug9iQlje_F8EvBqvSFXw/s1600/20180425+NZ+Unemployment+Trend.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="810" data-original-width="1600" height="324" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjOSZ_Fr9dko0hwhjbfgyth8wEQDGGCyUUk8_NsgsFgdrqTp5VIe6bffFVYg53PRlh55aODFslQbodSXgCAeva7HVyqrTBSAKpN44i4R3iyLuOG4Exsug9iQlje_F8EvBqvSFXw/s640/20180425+NZ+Unemployment+Trend.PNG" width="640" /></a></div>
<br />
Assuming this thing stays in the current downward trend, it can still take years of growth and/or stimulative policy before we can get to ~3% unemployment. And trust me, they'll need accomodative policy.<br />
<br />
Because when you look at growth:<br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhpEOkseJ2Z9gXD6slMkVLyOVKp4ru5yw9OVQDxEO81tLwtcbdRJMzbGPvbnVgaP7PuOf5mZDRP0aMsEzFUHtdgEQFUkcnIFyvYvi2_eJiOIEc-LXiMBVOonxCCX_JsFRYT5tjf/s1600/20180425+NZ+GDP+vs+Survey.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="816" data-original-width="1600" height="326" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhpEOkseJ2Z9gXD6slMkVLyOVKp4ru5yw9OVQDxEO81tLwtcbdRJMzbGPvbnVgaP7PuOf5mZDRP0aMsEzFUHtdgEQFUkcnIFyvYvi2_eJiOIEc-LXiMBVOonxCCX_JsFRYT5tjf/s640/20180425+NZ+GDP+vs+Survey.PNG" width="640" /></a></div>
<br />
Regardless of what the IMF thinks they see in their projection, growth to me has started looking like it has become stale and flaccid.<br />
<br />
With regard to rates: the OIS curve is still 75bps higher a year out versus the current RBNZ target rate of 1.75%. This could be too high if you assume they can't raise them and might actually have to lower them.<br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjRWtSjtD4AH3UztkwyiSNdqCWUirX2rE0JjYB2FA_inZVDB-KX7mEJvXVkMz2nwk7gPp06KxeRC44wWPaCnNZd6XaJSbiVQilvoFUZLbXOcEkrzWrKXc7HnT_9Fu0ZcjjOBMtQ/s1600/20180425+New+Zealand+OIS.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="836" data-original-width="1600" height="334" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjRWtSjtD4AH3UztkwyiSNdqCWUirX2rE0JjYB2FA_inZVDB-KX7mEJvXVkMz2nwk7gPp06KxeRC44wWPaCnNZd6XaJSbiVQilvoFUZLbXOcEkrzWrKXc7HnT_9Fu0ZcjjOBMtQ/s640/20180425+New+Zealand+OIS.PNG" width="640" /></a></div>
<br />
<br />
Subsequently, in REER terms, NZD in a vacuum is still somewhat expensive and could easily depreciate 10 to 15% further before it becomes historically cheap.<br />
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<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhz0F2DZjRTT5FtvtBo50c1pDL9psR_HR7ZRy8CCo_wNGHFTfQhGBKqEX6zjynwH6_zRS197ax3G0IMx5jGRdoO-J4TW5C8p-8cFYNqMPf-tUZjsoet9_45nFmJ2ByVsx0Ivs_N/s1600/20180424+NZD+REER.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="808" data-original-width="1600" height="322" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhz0F2DZjRTT5FtvtBo50c1pDL9psR_HR7ZRy8CCo_wNGHFTfQhGBKqEX6zjynwH6_zRS197ax3G0IMx5jGRdoO-J4TW5C8p-8cFYNqMPf-tUZjsoet9_45nFmJ2ByVsx0Ivs_N/s640/20180424+NZD+REER.PNG" width="640" /></a></div>
<br />
All signs point to lower for longer in New Zealand. As a result, even with this latest selloff, I still think there is still money to be made by calling your broker for a quote of NZD and telling him "Yours!"<br />
<br />
Good luck as always,<br />
<br />
DRMacro Clownhttp://www.blogger.com/profile/17196568155114537578noreply@blogger.com12tag:blogger.com,1999:blog-34323687.post-21897826969563860902018-04-24T17:37:00.002+01:002018-04-24T19:52:03.362+01:00Gold Hedge Not Working?A couple of quick things today:<br />
<br />
1) Just wanted to take the chance and thank Shawn again for the many insights over the last year or so. I thoroughly enjoyed and learned from your posts. With that said, I will do my best to try and keep this blog going while juggling my current work responsibilities.<br />
<br />
I've also personally grown through the feedback and reverberation of thoughts after my various posts and would encourage those who are interested in developing or sharpening their macro/trading analytical abilities to email the original macro man: mrmacro -at- gmail.com<br />
<br />
2) I wanted to quickly note one point: Gold in USD terms has failed to be an optimal hedge for the most recent move in inflation expectations.<br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg82rllsYnPlFjUFfzIKnGB6bGRUrzIdo_TT-baxeP1sQm2LOAG69I5kilvoB1fjYoB6GbnUmN9Wx5qbGWlSbax6nb1c2_qtAJWenr0oA3Bh5lscmuVy-etgDqyTWVgP_vKchJi/s1600/20180424+Gold+vs+Breakeven+Break.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="670" data-original-width="1175" height="364" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg82rllsYnPlFjUFfzIKnGB6bGRUrzIdo_TT-baxeP1sQm2LOAG69I5kilvoB1fjYoB6GbnUmN9Wx5qbGWlSbax6nb1c2_qtAJWenr0oA3Bh5lscmuVy-etgDqyTWVgP_vKchJi/s640/20180424+Gold+vs+Breakeven+Break.PNG" width="640" /></a></div>
<br />
I've done a more in-depth <a href="http://macro-man.blogspot.com/2017/11/case-study-can-gold-rally-along-with.html"><span style="color: blue;">study on <span id="goog_1238512131"></span>gold as an inflation hedge in a past post here</span></a><span id="goog_1238512132"></span>. I wanted to reemphasize some of those dynamics, as they seem to be at work.<br />
<br />
Many people buy gold as a hedge for inflation expectations. That doesn't always work. The real yield has held steady and has even risen as of late - if this persists, it will be very difficult for gold to catch a bid.<br />
<br />
Conversely, people expect inflation to be hampered if the real cost (inflation adjusted cost) of borrowing is rising. However, that is also a fallacy. Market inflation expectations are calculated via the spread between nominal bonds and inflation-linked bonds. As long as the nominal yield is rising faster than the real yield, you would, in essence, be witnessing a market expansion of inflation expectations.<br />
<br />
However, as previously mentioned, the rising real yield would be a damper on Gold prices.<br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgqpzAKJNICtsbB4C7KzeE4I2H9j7qxefFzu7qyWUotPhOrmFsJBw1dl893AXv8VLJXp_-h_8ry7cjTSTPTGLBCplovE27DW3Ckuj09HAzw0yCC9O-Swba7CW9l9O0YK3bb2Agu/s1600/20180424+10yr+Real+Yield.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="588" data-original-width="1139" height="329" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgqpzAKJNICtsbB4C7KzeE4I2H9j7qxefFzu7qyWUotPhOrmFsJBw1dl893AXv8VLJXp_-h_8ry7cjTSTPTGLBCplovE27DW3Ckuj09HAzw0yCC9O-Swba7CW9l9O0YK3bb2Agu/s640/20180424+10yr+Real+Yield.PNG" width="640" /></a></div>
<br />
<br />
The market since the beginning of 2018 has validated this theory. There are potential scenarios for this phenomenon of flat or declining gold prices to coexist with rising market inflation expectations into the future. For example:<br />
<i><br /></i> <i>- Imagine a world with persistently rising inflation (this scenario is much less controversial <span style="color: blue;"><a href="http://macro-man.blogspot.com/2017/09/soapbox-thought-piece-on-long-term-view.html"><span style="color: blue;">now than even 6 months ago</span>)</a>. </span></i><br />
<i>- Central banks are now inclined to lean on the hawkish side to combat inflation (this belief is <a href="http://macro-man.blogspot.com/2017/06/trumps-fed_14.html"><span style="color: blue;">much more prevalent now than even a year ago</span></a>). </i><br />
<i>- However, global central banks are "not allowed" to raise rates fast enough because there is so much debt floating around. A combination of increases in supply (<a href="https://www.reuters.com/article/us-usa-auction-allotment/foreigners-pull-back-in-week-of-record-treasuries-supply-idUSKBN1HG2YV"><span style="color: blue;">increased treasury issuances for example</span></a>), and rising inflation expectations, the bond market finally has the "ah ha!" moment by selling nominals en mass. </i><br />
<b><i>- The Fed cannot let real rates rise as rapidly as nominals, as it would hamper borrowing costs too much and make the existing debt incredibly difficult to service. Nevertheless, the Fed must let the real rate trend higher slowly as there is still a need to combat inflation.</i></b><br />
<b><i><br /></i></b> <i>The end result? Lower gold prices and higher breakeven inflation.</i><br />
<br />
All-in-all, gold can be a good inflation hedge at certain times, but buyer beware - warning signs are evident.<br />
<br />
Good luck,<br />
<br />
DR<br />
<br />
<br />
<br />Macro Clownhttp://www.blogger.com/profile/17196568155114537578noreply@blogger.com15tag:blogger.com,1999:blog-34323687.post-69896463138721239322018-04-13T16:04:00.002+01:002018-04-13T16:04:36.398+01:00Help WantedWell, as you can see from the post below there now a vacancy at the
helm of the Good Ship MM. I am still occupied penning an institutional
version and befouling the airwaves at Bloomberg, and while Detroit Red
will hopefully keep chipping in, Shawn will clearly be missed.<br />
<br />
However,
his gain (and the blog's loss) could also be yours! I certainly
derived a great deal of utility from the authorship of this space, and
as you can see Shawn did as well. As a means of keeping your skills
honed (and trying out new ones!) in a forum that is both crucible (via
exposing your view to public scrutiny) and shop window (by demonstrating
how smart you are!) , I would humbly submit that being the new <strike>Dread Pirate Roberts</strike> Macro Man is close to unparalleled.<br />
<br />
And besides, check out these great benefits:<br />
<br />
* Salary: $0<br />
* Health/vision/dental: None<br />
*401k: None<br />
* Vacation: At your discretion!<br />
<br />
In
seriousness, if you are interested in taking up Shawn's mantle,
particularly if you're an experienced punter between gigs, please hit me
up at mrmacro -at- gmail.com.<br />
<br />
<br />
-The Original MMMacro Manhttp://www.blogger.com/profile/12324967552369915949noreply@blogger.com62tag:blogger.com,1999:blog-34323687.post-65804971904256227502018-04-12T18:00:00.000+01:002018-04-12T18:00:18.583+01:00Goodbye For Now...and Some Market Parting Shots<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="327" src="https://lh5.googleusercontent.com/L-WtiWz2H9XOxeRodfEBT0DkIHMYjs-l7ZilUne69--SE07vOz-b0jKBd8mvj0a8k--uuPYyB2Ze8p5dlUrjOaSbTYxgHOlr2jx4nZMUgk7OjRlRth1yaY-Io7N6gGLKUGx5jabD" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></span></div>
<b id="docs-internal-guid-ffc72195-ba2f-a385-7586-39e12532853d" style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">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.” </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">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. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">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. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">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 </span><span style="background-color: transparent; color: black; font-family: Arial; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">different</span><span style="background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">. And </span><span style="background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration-skip-ink: none; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">different</span><span style="background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> is the one and only thing that generates alpha. Those contacts and new approaches to trading and investing will stay with me forever. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">With that I’ll end the sappy stuff and leave you with a few market observations:</span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">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 </span><a href="http://www.calculatedriskblog.com/2018/04/key-measures-show-inflation-increased.html" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration-skip-ink: none; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">posts this chart monthly</span></a><span style="background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">, which incorporates some alternative measures of inflation. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="444" src="https://lh4.googleusercontent.com/xc_W9pWj14kF62m6yjGgSlkVzFksvs1bTv4SA2APLmv85QbqWKPTRDGCMxc5Kh5iejDX-jEbXLGVfRkEXs5xMCE9w5UJMhWh-i8zwZQ9vGioD48j1F7UFE8mbNk21tFqkIqf92SR" style="border: none; transform: rotate(0rad);" width="640" /></span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">You can see they are all ticking up...then look at my favorite alt-inflation measure, the NY Fed underlying inflation gauges: </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<span style="background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="360" src="https://lh6.googleusercontent.com/A5EczN5-5xFHlV336Vk9qCL_q1iqphynVavAI_rbF9OgZEphzojtJRa4z4VpakWZXuSJViQvOZEhC8vG5VTC60Qm1nfs41CGdtEXB5VgmJMz1LDoyExc4kshRGkbCCQmu21UGdEo" style="border: none; transform: rotate(0rad);" width="450" /></span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">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. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Lastly, Ben Hunt over at Epsilon Theory </span><a href="http://www.epsilontheory.com/the-narrative-giveth-and-the-narrative-taketh-away/" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration-skip-ink: none; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">had a great post earlier this week</span></a><span style="background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> 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. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Combine those factors with the following: unprecedented fiscal stimulus, a tight labor market, </span></span><span style="font-family: Arial; font-size: large; white-space: pre-wrap;">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. </span></div>
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<span style="background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"> </span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">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: </span></span></div>
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<span style="background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="362" src="https://lh6.googleusercontent.com/OuNeu6An1B4zZP0K2ow8gUV-p3NuAL-Gg6jR4SR9JBh3UvTA0-fxS7wQraYJGejFK74kZeHbWccVtxiOYD4IUhEXq4VB61fYm1SW-9er97XOIqGAcMnnvIHw1rpjqBXD1_oRmD-X" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="360" /></span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="144" src="https://lh5.googleusercontent.com/2LVfoYeOCVxPBalWN-lEhBmcmZK-3SLFeUpX2jxbiq-rNd3ENOZVW1jd8wcGXQflkyklgNURrjv6vMJqpzs3UQjBe__kwfTNxpr0VHMZeDHrL8FKXs15ggG1mAMFXU0rnzqZZiXx" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="448" /></span></span></div>
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<span style="background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="430" src="https://lh5.googleusercontent.com/cUkfpNPDzXNfoNqGKtuEW6b1a_lU4Z7948XSRSud0pedrkUiRpUYV1wDAsgXIUmpiUJek1tkan9WWSHF-dqwcevvciHfNo8YAGxU4RlX0-H4WVMprtrdWJ-aHgmBeKF9R21LEsFr" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="541" /></span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b><br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">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. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">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:</span></span></div>
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<span style="background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="237" src="https://lh3.googleusercontent.com/ofXVDXsR1stRptNJhgkLElo4jq6sXr5aOPP9L5GOmvq5umDSNxZhprhyklJM-WwVqFLpnRjfUSAqvzzzk8Ug-fG8d2MopSYFvIvRQ9NluY_p5MnaPZP__bRMq8HK9jfv6zQNNvLC" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Despite EURUSD trading in a very narrow range. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="312" src="https://lh4.googleusercontent.com/rBgFpejbVyQ31nExewhxJ1x2Xw8jlCC1x-FUNXosZhicBRgCPtKMYO6yFz7hC4z04A5GFKkrgvkPMqQAk2WuW-hfCB6Pk25YNdSI9df4sZBJga8Yrmw200aakiGJPuokNvbzvnNy" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span><span style="background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> </span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"> </span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Economic divergence, extreme positioning and little price movement...combined with an abundance of geopolitical risks---buy USD. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">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.</span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="280" src="https://lh3.googleusercontent.com/mvwD85BBpii_r-IUA8JgMrFu609O5EG8kFDOVXrqrBqKM37wX_6JozrNRLkSRrSCxjce2D8v95zpq26WCmEzTrTWkmsZEdNOtxJbjYCp7jEzC0QJ8ek1xZgjCDp9JtttuCYeqzJd" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">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. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">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. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">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. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">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. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">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: </span><a href="https://twitter.com/EMinflationista" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration-skip-ink: none; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">@EMinflationista</span></a><span style="background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Shawn</span></span></div>
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<a href="mailto:TeamMacroMan2@gmail.com" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration-skip-ink: none; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">TeamMacroMan2@gmail.com</span></span></a></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<a href="https://twitter.com/EMinflationista" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration-skip-ink: none; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">@EMinflationista</span></span></a></div>
<br />EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com35tag:blogger.com,1999:blog-34323687.post-84761803277529911132018-04-04T23:16:00.001+01:002018-04-04T23:16:17.489+01:00Reading The Tea Leaves For WTIIn light of today's surprise EIA print. I decided to revisit the oil market to try and get a feel for sentiment and overall market fundamentals.<br />
<br />
First comes sentiment. Seems like most places I look, people are generally bullish on oil. Not a huge surprise. Usually, sentiment follows the prevailing price trend. And for oil, we've had a meaningful rebound from the lows. The oil glut crisis seems like a lifetime ago.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhd0ozDiVMI9hfABUGNzvexlkMqaZGfyqZtMB65HMX6Fy7pP_YkaDxmqswvBYMnli-i3lcW1TVVHcBVfESYnxA93cRC5yqgqIbL1DDKfE-j3USFBBiXp6Q0bYwvX7tuh4nY4cgV/s1600/20180404+CNBC+Oil+Excerpt.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="443" data-original-width="687" height="257" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhd0ozDiVMI9hfABUGNzvexlkMqaZGfyqZtMB65HMX6Fy7pP_YkaDxmqswvBYMnli-i3lcW1TVVHcBVfESYnxA93cRC5yqgqIbL1DDKfE-j3USFBBiXp6Q0bYwvX7tuh4nY4cgV/s400/20180404+CNBC+Oil+Excerpt.PNG" width="400" /></a></div>
<br />
Additionally, CFTC positioning is obviously pretty long. I encourage those with BBG terminals handy to go ahead and adjust it for Open Interest for a more accurate picture - although, I don't think it would change much.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiQhv20KQQLwBAynt6uZIW60EeN2PQ7mTa_So5PHr8LCqOSQmL6IAX1WkdWwBsb330SydG3eOGtjuhaeqltGadRpEzz_2sZf93I0kgyATEqGastGwAsh6ab6byA3Qyu9QpMjYK-/s1600/20180404+WTI+Positioning.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="483" data-original-width="856" height="360" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiQhv20KQQLwBAynt6uZIW60EeN2PQ7mTa_So5PHr8LCqOSQmL6IAX1WkdWwBsb330SydG3eOGtjuhaeqltGadRpEzz_2sZf93I0kgyATEqGastGwAsh6ab6byA3Qyu9QpMjYK-/s640/20180404+WTI+Positioning.PNG" width="640" /></a></div>
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<br />
But as traders, we profit from questioning the consensus. So let's dig into some fundamentals.<br />
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One of the drivers of the oil glut was the increase of US production and subsquently US oil exports. Reviewing the chart shows something peculiar. Around the end of last year, we've had a divergence between US oil production and US oil exports.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgW6FGN-FD8mHTujn_CjpMoFal_PLnv_TuA05ErmdHrrLE0oHCWUvStGKzoV-6fk1uUB6ZhoPl7OICIPm9b8iqCe9zdiiAtJBQ3M4Oq_1QMKUK4D5uqoe3BrXBlBH60mp7NXCvp/s1600/20180404+US+Production+vs+Exports.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="572" data-original-width="1012" height="360" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgW6FGN-FD8mHTujn_CjpMoFal_PLnv_TuA05ErmdHrrLE0oHCWUvStGKzoV-6fk1uUB6ZhoPl7OICIPm9b8iqCe9zdiiAtJBQ3M4Oq_1QMKUK4D5uqoe3BrXBlBH60mp7NXCvp/s640/20180404+US+Production+vs+Exports.PNG" width="640" /></a></div>
<br />
We are still pumping out that stuff but are not selling as much of it? Could it be that we are simply consuming more?<br />
<br />
Well, it turns out that's not the case either.<br />
<br />
At the beginning of this year, we actually saw a trough in US inventory. Since then, that bottom has been clearly made and inventory has continued to build.<br />
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<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhmSPO1fbshuJt2tV3CxrJ3LoBCoFdwLQGR7gV-JAplTmLE4j2q2bXAFY_34X94dELGAaS8ST322yRDdARP9sILTJ19Fz1g56ZPrBfPUupHs_Rm96REP7kvnUhtqAUmADG5XWCJ/s1600/20180404+US+DOE+Inventory.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="570" data-original-width="1059" height="344" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhmSPO1fbshuJt2tV3CxrJ3LoBCoFdwLQGR7gV-JAplTmLE4j2q2bXAFY_34X94dELGAaS8ST322yRDdARP9sILTJ19Fz1g56ZPrBfPUupHs_Rm96REP7kvnUhtqAUmADG5XWCJ/s640/20180404+US+DOE+Inventory.PNG" width="640" /></a></div>
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<br /></div>
Digging into the minutiae of the production numbers. We see that major players in the creation of the oil glut (Russia, OPEC nations) have steadily maintained their production. Now, I'm not saying the possibility of a production decline is non-existent, I'm just saying there's no sign of it right now via the official numbers.<br />
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<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjsRq6oTNBjliiRm6khTkJf1QDDubTk6Yb3yIBQ4807u9vPzx1frJfQTDEPw5XfEtPo_086XxuqQXr-eDtSrigD4Etr96jWiZqhv191Et6ewX4zD5n_f3sB4M0XR87nb_BIsHEv/s1600/20180404+Russia+Production.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="438" data-original-width="728" height="384" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjsRq6oTNBjliiRm6khTkJf1QDDubTk6Yb3yIBQ4807u9vPzx1frJfQTDEPw5XfEtPo_086XxuqQXr-eDtSrigD4Etr96jWiZqhv191Et6ewX4zD5n_f3sB4M0XR87nb_BIsHEv/s640/20180404+Russia+Production.PNG" width="640" /></a></div>
<br />
OPEC market share was crucial in the oil decline of 2015 as the OPEC nations could not step in to stem falling prices with production cuts.<br />
<br />
Today, it seems that the OPEC nations are back in a precarious position where they probably would not be able to continue supporting falling prices much longer.<br />
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<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiHQnHeGWnHkDECNnSE02aLxfCIORS30FeUOiAABiaDol3uqnplSUsnA1nCNL_cy_77GSChzIQTePhfzP_WFTgJirTL6n0SmQGe6WeE5qvC9IJnTZV_oxJXGrUvuZ39lfoX361E/s1600/20180404+OPEC+Market+Share.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="475" data-original-width="1475" height="206" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiHQnHeGWnHkDECNnSE02aLxfCIORS30FeUOiAABiaDol3uqnplSUsnA1nCNL_cy_77GSChzIQTePhfzP_WFTgJirTL6n0SmQGe6WeE5qvC9IJnTZV_oxJXGrUvuZ39lfoX361E/s640/20180404+OPEC+Market+Share.PNG" width="640" /></a></div>
<br />
Moving on to the Baker Huges Rig count. This has had a meaningful recovery back to early 2015 levels.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg8nyZEb3ozc-NAxlXSCLrDaCS1QIUrF5TgqVYffYBjaYl8Mcbm8H3cYbISQp6O5wPuvIIaNwMNuFqJffXI40F6lG7ka7LKXnTshLz7KBfkyGORJtjp0gr9RnH_hp5_JKvX1G-K/s1600/20180404+Baker+Hughes+Rig+Count.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="660" data-original-width="975" height="432" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg8nyZEb3ozc-NAxlXSCLrDaCS1QIUrF5TgqVYffYBjaYl8Mcbm8H3cYbISQp6O5wPuvIIaNwMNuFqJffXI40F6lG7ka7LKXnTshLz7KBfkyGORJtjp0gr9RnH_hp5_JKvX1G-K/s640/20180404+Baker+Hughes+Rig+Count.PNG" width="640" /></a></div>
<br />
<br />
Finally, from a more peripheral perspective, we have had a bursting of the sub-prime car bubble in the United States.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiwaSiTMyquSfz81jdUtoK1a_K3FhghlVeoP0xPIL65S17rglECC71eMLP0V6XfJciIy5qaj6yeSLAmDOR5rwnUe5mP9elsgMrJG16UdpziNFRqtWgFZg7f_vaf-BYqAf7Oyhcv/s1600/20180404+Subprime+Auto+Loan+Losses.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="714" data-original-width="1535" height="296" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiwaSiTMyquSfz81jdUtoK1a_K3FhghlVeoP0xPIL65S17rglECC71eMLP0V6XfJciIy5qaj6yeSLAmDOR5rwnUe5mP9elsgMrJG16UdpziNFRqtWgFZg7f_vaf-BYqAf7Oyhcv/s640/20180404+Subprime+Auto+Loan+Losses.PNG" width="640" /></a></div>
<br />
Subprime auto loans are trending towards 08 levels (probably a result of monetary tightening) and even prime auto loan losses have ticked up. Which probably ties into this next chart.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh_De3tNWxKFsKuyYgOoCn5s9H_0k-7fd8TqnPg9amM_gVY2I-wQPVRq2r9MX5xsSfkiEgHgDM-HQSX-g3QJXBuyhnD5M6SgH1cJLZLjk-VG8Nacfxy31jEtesStfvgyqB1WcLq/s1600/20180404+Vehicle+Sales.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="600" data-original-width="1462" height="262" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh_De3tNWxKFsKuyYgOoCn5s9H_0k-7fd8TqnPg9amM_gVY2I-wQPVRq2r9MX5xsSfkiEgHgDM-HQSX-g3QJXBuyhnD5M6SgH1cJLZLjk-VG8Nacfxy31jEtesStfvgyqB1WcLq/s640/20180404+Vehicle+Sales.PNG" width="640" /></a></div>
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Overal vehicle sales have stopped increasing and could be forming a top. As the glut of car buyers dry up, we can finally piece all of the pieces of the puzzle together.</div>
<div>
<br /></div>
<b>In my opinion, each puzzle piece snaps into place this way: </b><br />
<br />
<br />
<ul>
<li>The production that caused the oil glut never really stopped. In fact, non-OPEC production has only increased.</li>
<li>The OPEC countries took a pause when they could to help propel prices higher. However, the sustainability of that strategy is questionable in the face of low market share as evinced numerous times in history, as recently as 2015.</li>
</ul>
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhbHmzZU8wV1Zz2hvNCS94prToSe5kyWIehcsaPcIxMzjhcv2MXr1KjmkTGJ_a0Jmc6iYNN9ZqvOshOUUbdNNEBM9D0eXI06WSx38l0uvXo0Ht-0nJIN4KQWKgaRIdlsePCtRlp/s1600/20180404+OPEC+vs+Non+OPEC+Production+%2526+Total+Production.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em; text-align: center;"><img border="0" data-original-height="857" data-original-width="743" height="640" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhbHmzZU8wV1Zz2hvNCS94prToSe5kyWIehcsaPcIxMzjhcv2MXr1KjmkTGJ_a0Jmc6iYNN9ZqvOshOUUbdNNEBM9D0eXI06WSx38l0uvXo0Ht-0nJIN4KQWKgaRIdlsePCtRlp/s640/20180404+OPEC+vs+Non+OPEC+Production+%2526+Total+Production.PNG" width="554" /></a><br />
<br /><ul>
<li>Auto sales have benefited notably from the emergence of subprime auto loans. As monetary in the US tightened, those subprime buyers are leaving the market. (The increase in LIBOR also doesn't help as it means tightening for everybody).</li>
<li>As that source of demand dries up, sales are teetering on what looks like a top and could possibly be the shrinking demand explanation for the divergence of US production and export. A lazy way to measure this shrinking demand is looking at inventories. </li>
</ul>
<div>
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhBe1CBXEGPmftyG0jPwN-y92wSJ44ZvDQoNBctKeUeJIxgRRLDvbr77_CWm507RudmXULmmQF5AeF3EGS4pqrafWEczaMlabfHTVxqeKD1oUDW8U532wK-eRobrgWMIl_5EsIM/s1600/20180404+Oil+Inventory+vs+Px.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em; text-align: center;"><img border="0" data-original-height="555" data-original-width="960" height="370" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhBe1CBXEGPmftyG0jPwN-y92wSJ44ZvDQoNBctKeUeJIxgRRLDvbr77_CWm507RudmXULmmQF5AeF3EGS4pqrafWEczaMlabfHTVxqeKD1oUDW8U532wK-eRobrgWMIl_5EsIM/s640/20180404+Oil+Inventory+vs+Px.PNG" width="640" /></a></div>
<ul>
<li>The world still mostly thinks oil is a long, but with the aforementioned points above, it's probably to jettison that position.</li>
</ul>
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<br /></div>
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<br /></div>
<div>
Well, there you have it. Good luck out there.</div>
<div>
<br /></div>
Macro Clownhttp://www.blogger.com/profile/17196568155114537578noreply@blogger.com85tag:blogger.com,1999:blog-34323687.post-74324151417582639832018-04-03T05:10:00.001+01:002018-04-14T02:15:59.564+01:00More Market Pain: The VIX, Swaption Vol, EMFX And Some Investing Philosophy<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="438" src="https://lh4.googleusercontent.com/dKgLbAEd_lWw_077BcKB_LX1ROW_A4pG6S3NiGtKPevtF8gSfIQCRg6iVng1bw0wITEjRBTIoZ3X4dPWOL-hMHG5MfmPG_gl_W-OHQGuVLKNoHck6KvvPbC81lR1po-lR52m_V7f" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="342" /></span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<b id="docs-internal-guid-978838da-89b1-a327-7eba-072709d3d242" style="font-weight: normal;"><span style="font-size: large;"><br /></span></b></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">The Market: “Good morning!! How was the long weekend?”</span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Trader: “Great I guess, party at the in-laws. How ‘bout you?” </span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">The Market: “I spent the last 72 hours furthering my plans to cause you more pain.” </span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Trader: “Really...Why?” </span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">The Market: “Bwaahhhhhhaaaaa….assume the position!!”</span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">We can get into the cycle of looking for where the next bounce is going to come from, or if this is the second inning of a larger market collapse. What seems clear to me is that this is what we can expect from the market--far greater swings and moves on lesser news. That is an indication that liquidity is drying up and there isn’t new money coming in to chase valuations higher. The high valuations and tight credit spreads that practically every market commentator highlighted in 2017 are finally taking their toll. </span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Don’t take my word for it, take a look at the 5yr chat on the VIX. </span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="312" src="https://lh6.googleusercontent.com/nnvJEaRhXWQe5y3aGSy09odCgxlb9EsJBZLTm0eJQ5EPtoVIUBhzYaghQcC50iB5OzfxcYgzvLzT7RhQjM147PW9-kQ-qXhvR91QIgeNFoy0bjlLVsQXiMvFRyJHthV1iMNOO4Gi" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"> I can name from memory each of the events that are north of current levels. That’s not showing off my grasp on market history--it is an illustration of the fact that they were all *big* events. Or just *events”. They had a name. They had a story. </span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">This market seems like just the opposite. It is a selloff looking for a story. Is it anxiety over tech? Is it fear about the impact of a trade war? Or...is there just nobody on the bid anymore? </span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">My money is on the latter….yet what continues to befuddle me is the lack of movement or realized volatility in other asset classes. This is a regression of the vix against 3m/10yr swaption volatility. </span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="295" src="https://lh6.googleusercontent.com/edaL35OYU3-_GdTau-bQkiF_np4T6LXdqB4F9CjTGgZQVKu4A-iiUu7fsm6d01vkVB6VO_NwWW_Wann-Ob08KvJZT1YW-CxLB2k6cXTAg4Cz_q8B9R3ds3psRG_NGCQZJd9rlKBE" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="529" /></span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Quite frankly it is a pretty worthless regression analysis but I wanted to pull up a chart that illustrates just how low interest rate volatility is compared to equity volatility. </span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">There are also those that are looking for a USD to move higher as market stress increases. These two factors are probably two sides of the same coin. I went over some of the factors driving CAD and AUD last week. JPY has also traded by its own twisted logic...strengthening earlier this year on the back of of optimism about global manufacturing demand, local growth, and BoJ stealth tapering--and then as market stress increases, which has usually put a bid into the yen, it simply does nothing. </span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">What about the spicy stuff...high-beta EMFX? Surely the high risk/high carry currencies have sold off? </span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="199" src="https://lh5.googleusercontent.com/jBM7c4yAb4xGKcQsqUUzbzQYZpv93cyPDURWxITwXU8zehON7P2jc7cbEKQXBv8ImAbVX1BaDpUW5dv1uHYJUPvorKWqvGI6MsrfCFYjSqvz6fW6-6DN6ra8VW2YaD7AbSyEfOCi" style="border: none; transform: rotate(0rad);" width="640" /></span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Meh….not really. TRY has its own problems...if we throw that one out, the big “loser” in this chart is BRL at -1.5% YTD….a loss in the spot price you made up in carry!</span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">FTQ assets like treasuries aren’t rallying...rate vol isn’t moving much...and EMFX is showing unseasonable warmth. The rest of the picture isn’t quite adding up to me--at these levels I’d lean towards some combination of these assets--like buying receiver swaptions and selling EMFX as a better expression of a bearish view than simply selling stocks. </span></span></div>
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<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b></div>
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<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">On a more philosophical note, over the weekend I came across the excellent </span><a href="https://behaviouralinvestment.com/" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">“Behavioural Investment”</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> blog. It is a succinct, well-written set of posts on various investing issues that animate me--like cognitive biases, misplaced incentives, and the perils of generating alpha. The most recent post was entitled, </span><a href="https://behaviouralinvestment.com/2018/03/27/things-that-fund-managers-dont-say-enough/" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">“Things That Fund Managers Don’t Say Enough.” </span></a></span></div>
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<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Here are a few of my favorites, with my editorial comments in italics: </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"> </span></span></div>
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<span style="font-size: large;"><span style="background-color: white; color: #444444; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">“It was a genuine mistake – our analysis was incorrect, but I will make sure I learn from this for future decisions.” </span><span style="background-color: white; color: #444444; font-family: "arial"; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> CIOs don’t appreciate this level of humility from the PMs. Most would respond with “And next time I’ll make sure to hire someone that isn’t learning on my dime.” </span></span></div>
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<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b></div>
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<span style="font-size: large;"><span style="background-color: white; color: #444444; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">“Although the trade was profitable, the situation did not develop as I had imagined and its success was actually just a dose of good fortune” </span><span style="background-color: white; color: #444444; font-family: "arial"; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">I always appreciated the bloomberg header of a good friend…”Better lucky than good!” There’s a guy that fears nothing. </span></span></div>
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<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b></div>
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<span style="font-size: large;"><span style="background-color: white; color: #444444; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">“I appreciate that recent market volatility feels significant, but I don’t want to focus on it because, on a ten year view, it is likely to seem meaningless”. </span><span style="background-color: white; color: #444444; font-family: "arial"; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> More PMs would be willing to say this if they had a ten year lockup on their investors’ money. </span></span></div>
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<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b></div>
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<span style="font-size: large;"><span style="background-color: white; color: #444444; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">“I appreciate that I previously held a high level of confidence in this view, but, after careful analysis of new evidence, I realised that I was wrong”. </span><span style="background-color: white; color: #444444; font-family: "arial"; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">There are dissertations to be written about this one...if you’re hired to manage money you’re self-selecting as smarter than the market--so when the market shows you that you’re wrong, it is hard to admit….because some important people think you’re smarter than the market!! How often do you see a professional athletes publicly admit they got worked by the competition? Pedro Martinez once said the Yankees treated him like they were “his Daddy,” and he literally never heard the end it. </span></span></div>
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<span style="background-color: white; color: #444444; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">The lesson: know what you’re good at, stick to it. Stay humble, and don’t be afraid to admit mistakes within that circle of competence. And while there is good reason to stray outside of that circle from time to time--don’t allow you’re mistakes (and thus by definition, you’re successes) there to be big enough to have to be explained to someone more important that you. </span></span><br />
<span style="background-color: white; color: #444444; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><br /></span></span>
<span style="font-size: large;">Shawn</span><br />
<a href="mailto:TeamMacroMan@gmail.com"><span style="font-size: large;">TeamMacroMan2@gmail.com</span></a><br />
<span style="background-color: white; color: #444444; font-family: "arial"; font-variant-east-asian: normal; font-variant-numeric: normal; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"></span></span><br />
<span style="font-size: large;"><a href="https://twitter.com/EMinflationista" target="_blank">@EMInflationista</a></span><br />
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EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com55tag:blogger.com,1999:blog-34323687.post-16291409990543959902018-03-30T16:36:00.000+01:002018-04-14T02:15:47.075+01:00AUD and CAD Weighed Down By Higher Funding Rates<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
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<span style="font-family: "arial"; font-size: large; white-space: pre-wrap;">In a recent conversation I almost broke out into laughter when a trader asked me, "do you trade value or momentum?" Yeah, well let me tell you brother...you don't survive in this business by nailing yourself to the cross of a trading dogma. You survive by changing with the regime, identifying opportunities the market is ignoring, and riding the wave when it turns. Once you marry yourself to a philosophy, you're going to be caught with your pants around your ankles when the market changes and leaves your trading style in the dust. </span><br />
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">And indeed, when you look at a market that has been completely schizophrenic over the course of the past six months, you need look no further than CAD and AUD.</span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Over the course of this year, these two commodity currencies have notably underperformed--not only in the DMFX universe...</span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="280" src="https://lh6.googleusercontent.com/P1ZN10CVfmoigGN7bw9vEmBUYwDyxSmXgNFSL_4KVAV35ape8C5gSHGo98twHyY-ethjVXpRvNO3sxN8ap0wBRs_KwiPb3Ah9etBlPhEY5D6XOWDjBaJLvaOCqRF-IjqiMxm370u" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">But also in comparison to a broader set of commodity currencies (I included EUR as a “control”). </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="280" src="https://lh6.googleusercontent.com/0TEwV1ilpECxAkgsxIXWPTCbsjmjyOBtausdpB2AlzYZxLbsrqaQl-tR5n7QbQesqe3WfCNRQp5k1GvQ8-EjXHlqUocZJ_r124KztU6l0dAsjM4hpKGLHmtpMW5fgzu0mqjmCRC_" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">When you consider the break with high beta carry trade currencies like ZAR (and MXN, which I left out), oil plays like COP and NOK (sure, Norges Bank is hawkish, but come on), and underperformance even against recent commodity EMFX laggards like CLP and RUB, it’s time to start sniffing around for other explanations. </span></span></div>
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<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">A few weeks ago </span><a href="http://macro-man.blogspot.com/2018/03/cad-and-nafta-risk-show-me-money.html" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">I picked up on this underperformance in CAD</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> when there had been some noise in the media to suggest it was due to NAFTA risk. I noted that was little to suggest that this move had anything to do with NAFTA. Since then, that hypothesis has proved to be correct. While the steel tariff/trade war story did pick up some steam, there has been some signs of progress on NAFTA negotiations--one need look no further than the Q1 2018 currency champion: MXN...a currency with a morbund economy and a populist/nationalist leading the polls for an upcoming election! </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">I rebuilt this regression analysis over a five year period--comparing spot AUD and spot CAD against a basket of commodity prices (metals for AUD, and oil for CAD), S&P implied volatility, and importantly--the spread of 2yr local rates vs. US swaps. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">In AUD, you can see these factors have been VERY heavy over the last few weeks. I highlighted the move in spot AUD down from over .80 to .77 with my color crayon. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="263" src="https://lh4.googleusercontent.com/aKRZMtStKVlstyntuIHIOGgLsWZN7UZ844s1cxCxBOcXrJDWgaC4xJGQvc0itDnk1HLijrtvzsaQEDoaVpIgrFyF96zlk99a0meSfZlRnS1NK1B1tJJaZsq8A59GjQBmMUbX1dWQ" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Source: JP Morgan data </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">And similarly in CAD...I highlighted the move up from 1.24 to over 1.30 </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: large; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="256" src="https://lh4.googleusercontent.com/F3bbQDHsRD6s7c2epW-U9dEjrp2346sOiYwUgG2dlB5Jqp4Pom-uvKXA3BG7kUnY4xRYELb4FiVAd7O_quPfD2CXiVQrdM4kLdcwdTX1P6NDrh6EHizamiAML2ZXKfe8mxNCEU2i" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Source: JP Morgan data </span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">What this data shows us is that there isn’t much going on here that we wouldn’t expect from the underlying drivers of these trades. But that brings us back to the the libor trade….which has much as I hate to say it, seems to be the TMM2 white whale lately. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="280" src="https://lh6.googleusercontent.com/x2UGnsOfqqjZN4ZJd_okx31w_Uvxj-ef_HizbUm9VUUlteqsYG_8HU_qfK-SJ5btUq8meVTcq-NxvNk9rHcBOOfeNIFVoGSeBaGjWwdEuFbixB8uGqwkwOsjzygBfmzrgK97r206" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">That factor model is driven by the spread in swap rates--and US 2yr rates have risen by 20bps in excess of fed expectations, just in the last three months. That has had a material impact on the “modeled” value for AUD and CAD...two currencies for which interest rate spreads are very important. </span></span></div>
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<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">And thinking more about the fundamentals, </span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 700; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">there’s even more to suggest that the widening in LIBOR/OIS has been a driver for underperformance in AUD and CAD.</span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> Aussie and Canadian banks are big players abroad. They’ve made so much money in their home markets they are constantly on the prowl for opportunities in foreign markets--and much of their lending is benchmarked in USD. </span></span></div>
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<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Over the past few years, names like Scotia, NBS, and RBC in Canada and Westpac, Commonwealth Bank and Macquarie in Australia have been very active in the CP and cross currency basis markets. Some of those liabilities have termed out as the banks took advantage of easy credit conditions in late 2016 and 2017, but their USD borrowing is still significant. There’s no doubt </span><a href="https://www.bloomberg.com/news/articles/2018-03-27/aussie-banks-face-squeeze-as-conduct-probe-crimps-pricing-power" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">they are feeling pinch of higher funding costs</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> and are likely changing their funding strategies in reaction to the changes in the US tax code, something that has been </span><a href="https://www.wsj.com/articles/beat-up-u-s-tax-provision-may-sting-foreign-firms-1518526800" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">whispered in the media for a while</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">, but has taken on new life in the past couple of weeks as a </span><a href="https://ftalphaville.ft.com/2018/03/23/1521832181000/Cross-currency-basis-feels-the-BEAT/" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">the sell-side analyst community pulled back the curtain on some of these changes. </span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">(p.s. Thank you to everyone who sent me the underlying research piece!) </span></span></div>
<span style="font-size: large;"><br /><span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;">Where does that leave us trading these currencies? The regressions show AUD is right on the screws with the model, and CAD is still a touch rich, if anything--and while I'm sure there are those that will suggest that these funding pressures don't have an impact on spot, the direct funding pressure on the banks argues otherwise. </span></span><br />
<span style="font-size: large;"><span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"><br /></span></span>
<span style="font-size: large;"><span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;">More importantly, </span><span style="font-family: "arial"; font-weight: 700; vertical-align: baseline; white-space: pre-wrap;">in addition to the usual correlations with DXY, commodity prices and overall risk appetite, keep an eye on funding costs and the libor/ois spread!</span><span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"> A big move in either direction will be a driver, even if there aren’t any big changes in monetary policy expectations from the BoC, RBA or Fed. </span></span><br />
<span style="font-size: large;"><span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"><br /></span></span>
<span style="font-size: large;">Shawn</span><br />
<a href="mailto:TeamMacroMan@gmail.com"><span style="font-size: large;">TeamMacroMan2@gmail.com</span></a><br />
<span style="font-size: large;"><span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"></span></span><br />
<a href="https://twitter.com/EMinflationista" target="_blank"><span style="font-size: large;">@EMInflationista</span></a><br />
<br />EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com35tag:blogger.com,1999:blog-34323687.post-73929808340596260822018-03-27T19:20:00.000+01:002018-03-27T19:24:04.207+01:00An exercise in connecting the dots: the Libor-OIS spread<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj-basCjyI2GtX1737fnU-AUhyphenhyphen4xIquAgT99J9BWMXPoiiyrdBodIKynLCG43tKoXH5xi0_NPpt_czBID832l_Prxrzdx8mcCzsi1mcI-LcdcpAhFjuLQaCHQP3tjMroh8Dsbad/s1600/true-detective-920x584.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="584" data-original-width="920" height="253" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj-basCjyI2GtX1737fnU-AUhyphenhyphen4xIquAgT99J9BWMXPoiiyrdBodIKynLCG43tKoXH5xi0_NPpt_czBID832l_Prxrzdx8mcCzsi1mcI-LcdcpAhFjuLQaCHQP3tjMroh8Dsbad/s400/true-detective-920x584.png" width="400" /></a></div>
The Libor-OIS spread is such a technical topic that I will leave the
details to professionals with a much more profound understanding of it (plus Shawn already wrote a very good post about it). I
am just trying to investigate the subject from a different angle.<br />
<br />
I have been thinking about a few things some very smart investors
shared with me and I am finding connections between the following:<br />
· <b>A tactical long view on USD and the fact that investors
will, during the next downturn, sell the most liquid asset they own
first</b> (although I personally believe a proper USD bounce should happen only after a credit event of some sort).<br />
· The recent <b>Libor-OIS</b> spread widening, which got a lot of attention. I am not convinced by either bearish and bullish views.<br />
<br />
· The <b>bullish case</b> concentrates on the fact that
most of the widening is coming from T-bill increase in issuance, that
should decrease in the near term. There is no clear correlation between
the recent increase in T-bill issuance and an increase in CP yields (I
understand the RV argument, but that cannot explain the full move
alone).<br />
· The <b>bearish case</b> concentrates on the fact that
the wider spread would signify a tightening of funding conditions and,
potentially, a Dollar shortage. If this was the case, I guess the xccy
basis for Eur and Jpy should widen too (this has happened in the last
few days, but almost as a reaction to the Libor-OIS move).<br />
<br />
I think the pressure is mostly coming from <b>tension in the commercial paper/short duration credit space</b> (as
T-bills widened earlier in 2017 and they recently outperformed vs
Eurodollars and Libor, not showing much of a sign of overwhelming
issuance). This is potentially confirmed by the fact that low beta,
short dated paper, have been under-performing the credit market in
beta-adjusted terms. What is interesting is that the same part of the
credit curve is under pressure also in the European market.<br />
<b><i><br /></i></b>
<br />
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><img data-li-src="https://media.licdn.com/dms/image/C5612AQG4stk1EkGKWQ/article-inline_image-shrink_1500_2232/0?e=2121375600&v=alpha&t=52qD8s0-P5m7q0q3d_QuXu_qjdmJVtfWtcrYsdF50vY" data-media-urn="urn:li:digitalmediaAsset:C5612AQG4stk1EkGKWQ" height="271" src="https://media.licdn.com/dms/image/C5612AQG4stk1EkGKWQ/article-inline_image-shrink_1500_2232/0?e=2121375600&v=alpha&t=52qD8s0-P5m7q0q3d_QuXu_qjdmJVtfWtcrYsdF50vY" style="margin-left: auto; margin-right: auto;" width="400" /></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><b><i>CP yields rising relative to Fed Funds (%). Source: Citigroup</i></b></td></tr>
</tbody></table>
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<br />
<b><i><br /></i></b>
<br />
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><img data-li-src="https://media.licdn.com/dms/image/C5612AQHZNgutgjgmZg/article-inline_image-shrink_1000_1488/0?e=2121375600&v=alpha&t=nhAxAxjsH3KUBMah3Qr4-mwFy18r6ALrCaxHmLXWlJw" data-media-urn="urn:li:digitalmediaAsset:C5612AQHZNgutgjgmZg" height="260" src="https://media.licdn.com/dms/image/C5612AQHZNgutgjgmZg/article-inline_image-shrink_1000_1488/0?e=2121375600&v=alpha&t=nhAxAxjsH3KUBMah3Qr4-mwFy18r6ALrCaxHmLXWlJw" style="margin-left: auto; margin-right: auto;" width="400" /></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><b><i>1-5y US HG corporate bond spreads vs CP rates. Source: JP Morgan</i></b></td></tr>
</tbody></table>
<div class="slate-resizable-image-embed slate-image-embed__resize-full-width">
</div>
<br />
A recent JP Morgan research piece pointed out that the tension might
not be coming out of repatriation flows only, as that would have called
for <b>a flattening of the credit curve</b>, which, during the last leg of the move in the Libor-OIS spread, <b>did not happen</b>.<br />
<br />
<b><i><br /></i></b>
<br />
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><img data-li-src="https://media.licdn.com/dms/image/C5612AQEqC8ISydDIZQ/article-inline_image-shrink_1500_2232/0?e=2121375600&v=alpha&t=N5FzeT0my1gabk8moZTfuE29H1-rW4_MMxPdu2QOV7w" data-media-urn="urn:li:digitalmediaAsset:C5612AQEqC8ISydDIZQ" height="120" src="https://media.licdn.com/dms/image/C5612AQEqC8ISydDIZQ/article-inline_image-shrink_1500_2232/0?e=2121375600&v=alpha&t=N5FzeT0my1gabk8moZTfuE29H1-rW4_MMxPdu2QOV7w" style="margin-left: auto; margin-right: auto;" width="400" /></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><b><i>Change in spreads on the JPM JULI Domestic index of US high grade corporate bonds by maturity bucket in bps. Source: JP Morgan</i></b></td></tr>
</tbody></table>
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</div>
<br />
I think these developments should be followed very closely. In fact,
at least for the moment, I see banks` excess reserves remaining ample,
which should support the FX swap market. This could change if an
increase in T-bills issuance starts weighing indirectly on banks` excess
reserves.<br />
<br />
<b>I wonder if we might be closer to a downturn than the market expects,</b> with <b>market participants starting to sell liquid assets, but in a slightly different fashion</b>,
as we are still in a very low yield environment. They might have
started liquidating some very expensive government bonds between end of
2017 and beginning of 2018, but, after a certain level of yields was
reached, moved into selling short-dated corporate paper. If this trend
in low beta corporate paper selling should continue (which is a big if),
together with a continuation of the increase in T-bills yields (driven
also by an increase in issuance and higher Fed rates), it could create
pressure at funding level. This would potentially translate (at a
certain point) to a <b>shortage in Dollar funding, which could theoretically be supportive for USD itself</b> (like
in 2008, with the USD bouncing only after Bear Stearns at the beginning
of the year), which would be in line with the view of a potential
tactical bounce.<br />
<b>I think one of the scenarios the market is not pricing is
that the Fed might have already tightened (or it is very close to)
financial conditions too much, but other elements may have hidden this,
especially in 2017 (i.e. Chinese liquidity injections).</b> Something
like what I tried to explain above might be one of the canaries in the
coal mine. I understand it is a bit of a far-fetched hypothesis, but I
would appreciate any thoughts or feedback, especially those that go
contrary to my view.<br />
<br />
(Disclaimer: I took some liberty in using some of the analysis done
by Citigroup (Matt King). You can find most of its piece on Zerohedge in
case you have no access to Citigroup research (<a href="https://www.zerohedge.com/news/2018-03-20/why-citi-suddenly-freaking-out-about-exploding-libor-ois)" rel="nofollow noopener" target="_blank">https://www.zerohedge.com/news/2018-03-20/why-citi-suddenly-freaking-out-about-exploding-libor-ois)</a>)<br />
<br />
<i><br /></i>Jurofalcohttp://www.blogger.com/profile/09675225771278210268noreply@blogger.com41tag:blogger.com,1999:blog-34323687.post-1857394221448353162018-03-26T05:15:00.002+01:002018-04-14T02:15:33.778+01:00This Is What It Sounds Like...When the Regime Dies<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">After a few go-go years in the stock market, it is easy to forget what a choppy market looks like. </span></span></div>
<b id="docs-internal-guid-438e6217-6084-21b2-0fd3-4ad1f0f00bee" style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Here it is folks. Simple as that. I can cite any number of reasons, valuations, growth underperforming-too-high-expectations, trade tensions, an all around bumbling US government from top-to-bottom, and a central bank that is bound and determined to take the punch bowl away. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">In the end, nobody can tell you exactly why the market can’t get out of its own way. All we know for sure is that the momentum trade is dead--RIP Mo-Mo! Look, readers of this blog will know I am not big on short-term calls, technicals, or other forms of market prognostication. But the reason I posted this chart is because I do believe the market has a certain style of trading over relatively long periods of time. Some call them “regimes”. I believe the market saw a regime change with the short-gamma/short-vol implosion trade that started at the end of January. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">That crushed the momentum traders--and to make matters worse, there have been a couple of times where it looked like stocks were finally going to get on the canvas and start trading like 2017 again--only to fall into another 50 point intra-day death spiral.</span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="380" src="https://lh4.googleusercontent.com/NJXE_LieB3LMV2FOuSgTLkUmSnZNCK6kPfKvqvP4R2Holne3MJIhTlvigE8uSblvKnOKLciQhBX7DtJh7z3v90wZmOUhwzSH1lIp9uuAy7m_ImerM2TIynXrFpZi8RVGcnpk4MnM" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">That is how equities trade in years when the market just kinda stinks for one reason or another. Look back at the chart above. There are years like 1994, 2008 and 2011, when various and sundry financial crises were crushing profits and market confidence. Similarly, in 2000, the market had finally run out of dot.com buyers. But then think about years like 2002, 2003, or 2015. The market simply couldn’t get over its various forms of anxiety. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Does that mean it is straight down the elevator shaft for equities? No, I don’t think so, not without a significant downside catalyst--a big drop in growth, a sudden cliff in employment, or some kind of credit event, or the dank roadkill-like stench of one ahead. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">And yes, that serves as a nice segue into the latest update on the roadkill known as US money markets. No rest for the wicked...chalk up another 5bps higher in the libor-ois spread vs. this time last week. </span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="252" src="https://lh4.googleusercontent.com/hvaTF9i_DAwfgilLuUZmUGNfTvTv3B0dx4na9-iO3uE_OpwtOTH_seawf_B4l2ZcuBaU6VcluzCAMkXFo-OaANsTtpFooVXMVKE4PjlYR28RSFH1aibFdgnazF05hSXRVLqB5n9a" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Yet...and yet!! I continue to believe we are seeing the beginning of the end of this move wider in spreads. Repo levels remains stable, indicating there is no broad grab for easy financing from big players that are desperate for dollars. And the chart below shows that the spread of commercial paper rates over OIS--and tbill rates over OIS, actually came down a bit last week. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="300" src="https://lh4.googleusercontent.com/tg3ionyud8eN-rHsFAA7bwv-qXotkrl8aphkCxvZbuqUVGjaYX_8A7266JarvzLmPsUuv3-CjgRO1Q762-jSBMTj-seeTLrwI-e8QvMYH-J3sgyGGInzQzLXt0P9h12VaJIgalrH" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Which makes this week’s move wider in libor/ois spreads all the more perplexing--the market wasn’t fooled--front end swap spreads (proxied here by the 2yr treasury future vs. swaps, “TU invoice” and the 3m6m libor/ois swap) either chopped around or moved modestly tighter. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="280" src="https://lh5.googleusercontent.com/E52GgXrUYq8b8RoKSPev9MsQxEDq773zB9VZ2DeIJdUr5G5PotRjfKg5bBWylLyF0bDOfitluEQxUlvMgwnWBADZZobWNFCsouFUn-erfKmL_pGfWNvBJBFDl0I7DRQmJcmFNb0A" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">One of the highly respected analysts at one of the sell-side banks published a piece on Friday mentioning that a more arcane piece of the new tax code eliminated a tax incentive for companies--mostly foreign banks--to use the cross-currency swap market to fund foreign operations--instead pushing them towards other funding sources, like commercial paper. I don’t have the piece (</span><a href="mailto:teammacroman2@gmail.com" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">teammacroman2@gmail.com</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> if you have a copy!!), so I can’t opine on it--i’m not even sure I’m selling the thesis correctly from the headline I read--but it is a compelling hypothesis from a guy that really knows his stuff. </span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Either way--that leaves “just plain old credit” as the residual. The bloodbath in equity markets combined with “basically unch” risk-free rates led to a tit-for-tat widening in credit spreads. </span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="280" src="https://lh5.googleusercontent.com/eXw6U7JKqpkA1DZLmoSWcUBKBk7zTlCoV8aqTgQM2Xkra7HhzRb-NYiBgspPfYOPw_tnd7vdLynHCTL8tJqsBDysh9AbFeWXvBNfw-ldaaCq_EDEiEHabwa-O9bUx_0CN0H8y69X" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Add this stress--or at least the return of some semblance of sanity--to credit markets at large, combined with some indications that </span><a href="https://www.bloomberg.com/news/articles/2018-03-20/soaring-u-s-libor-rate-trickles-into-funding-markets-worldwide" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">the move in libor is hitting markets outside the US</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">, and the picture starts to make sense. The latest catalysts are all modestly negative--and that has the power to unwind the positive narratives that supercharged stock markets throughout the past two years. </span></span></div>
<span style="font-size: large;"><br /></span>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">I like to believe that brings the market downdraft to a simple solution--an inversion of catalysts, a regime change, and a momentum break--all of which combines to cause a reversal in flows. Maybe it's more complicated--but I think it illustrates that the market will need a new narrative--and probably a lot of time-- to push to new highs.</span></span><br />
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><br /></span></span>
<span style="font-size: large;">Shawn</span><br />
<a href="mailto:TeamMacroMan@gmail.com"><span style="font-size: large;">TeamMacroMan2@gmail.com</span></a><br />
<a href="https://twitter.com/EMinflationista" target="_blank"><span style="font-size: large;">@EMInflationista</span></a></div>
EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com33tag:blogger.com,1999:blog-34323687.post-55894477614883973532018-03-19T05:10:00.001+00:002018-04-14T02:15:19.833+01:00The Anatomy of a LIBOR Panic: New Wides For LIBOR/OIS<div class="separator" style="clear: both; text-align: left;">
<span style="font-family: "arial"; white-space: pre-wrap;"><span style="font-size: large;">Welcome back MM readers--apologies for the unscheduled hiatus last week. I spent a few days enjoying the technological miracles of the US healthcare system. Keen readers may notice I almost never make a call on stocks, stock sectors, or egads….single name stocks--but it is tough for a trader to walk away from a couple of days in and around a hospital without thinking that there is a lot of capital and profit sloshing around in that place. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Since I was disconnected from markets much of last week I’m going to circle back to the widening in LIBOR/OIS spreads that has continued unabated since I wrote about it a few weeks ago. I'm sure this has been to the erm...consternation of more than a few traders like our good friend here: </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><br /></span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><iframe allowfullscreen="" class="YOUTUBE-iframe-video" data-thumbnail-src="https://i.ytimg.com/vi/b6xoL76TbnQ/0.jpg" frameborder="0" height="266" src="https://www.youtube.com/embed/b6xoL76TbnQ?feature=player_embedded" width="320"></iframe></span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><i>Actual footage of a macro trader reacting to the latest LIBOR fixings</i></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><i><span style="font-size: large;"><br /></span></i></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="405" src="https://lh5.googleusercontent.com/629nfQ98J0H8mAZwcbVPNeRotVw9jJaAbMbf5NvRfjr7RYxSrnF3AdxLpUglY8ZNTvg2xlDZmFHVljfphwFPJfuBAy-gYKSEg6hY5ARHvK5lMmqdVjZQRVpTkrGEYxveNl9f8DHD" style="border: none; transform: rotate(0rad);" width="640" /></span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">JPM published this chart showing that the current 3mo libor/ois spread is at its widest post-crisis level. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="406" src="https://lh6.googleusercontent.com/e5Q5zdeZ-Y8KH4oKjWk9LUaj6p7vI0xhS23ecrZuyrfbsBjeVas5_QMqYjRxfiMUi_6Iqig3gYPVN37QjaIJCDn4riCB4KJ31ErshIz9IjKX4BKqhN5sBr-rrwQRgBHGajPpBRWn" style="border: none; transform: rotate(0rad);" width="640" /></span></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">That’s amazing, given nobody has really noticed outside of this small sector of the fixed income market. Even the 2016 money market reform move made some headlines in the financial media, even if it didn’t penetrate the white hot din of the US election media coverage. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Sure, there have been a few articles in bloomberg and the WSJ that have highlighted the move higher in LIBOR, what might be driving it and what it might mean for the regular Joe. Quite honestly, with a little time away from it, I think the coverage has overcomplicated the issue. <b style="text-decoration-line: underline;">What I think the market is missing is that this really is a plain vanilla credit story.</b> </span></span><br />
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><br /></span></span>
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">What makes it different is the magnitude of the move, one driven by the confluence of competing supply and demand factors. </span></span><span style="font-family: "arial"; font-size: large; white-space: pre-wrap;">Yes, there are many factors that are driving this move, but I think they can be simplified into only two or three. The first, and arguably most important, is the US tax reform. This incentivized US corporate treasurers to start repatriating foreign-domiciled assets, much of which was invested in short-term corporate debt. </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">And yeah, that matters! What I think has been slightly deceptive in the media coverage of this move is that it has been sold as “having nothing to do with credit,” or that credit hasn't been a driver because various other basis trades (3s6s, xccy basis, etc.) aren't moving much. That’s only partially true, especially when you look at this chart: </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"> </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="280" src="https://lh4.googleusercontent.com/mQKYNZQ1tN1zVW2USCBk8_f7FWagfnYkcP7VdQAtVoVmvIm-JAnYSnDUgWOapmbYCxAy4rSM9dcRi9PoHMFizcPlzetA6xOh2GE7L5b5QvTIeFV_ZrrPQZWlmElbXbnJTWdc9PIx" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Put another way, since the beginning of February you’ve lost all of the spread tightening move since June of last year. This chart also highlights that the weakening of markets in general might also be at play here--an overall weakening of credit markets has caused a re-pricing of the entire credit complex...including commercial paper, bank funding and thus LIBOR. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">The second factor is commercial paper. Treasurers are pretty smart people--and most of them have a guy that is sitting in front of a bloomberg terminal all day thinking about how he can fund the company’s working capital 5bps cheaper for a few months. When these guys figured out the tax reform was for real and, later--that there would be an acceleration in t-bill supply because of the bipartisan spending agreement struck in early January, those treasurers wasted no time in tapping the market. Commercial paper outstanding accelerated throughout Q4 and picked up at an even faster pace in January. This acted as a sponge for money market cash...</span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="251" src="https://lh3.googleusercontent.com/TM2G6bRqlPAfMNvS-7I3Br4Z9zYgECi9eVBwqf9TbpTN-mq-n-z-3UbWsq8Fmera03uQcZkBdMh5unBJo-Hb9p8vUZhLKB5b4qGsMngkXEvsVlDzufCtlq_a-OkAr4yihaKTmYhJ" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">...Which left the market dry as a bone when the US government dramatically accelerated t-bill issuance in February, increasing the amount of bills outstanding from roughly $2trn to $2.2trn. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="288" src="https://lh5.googleusercontent.com/Sxc1aW45U7o43lDrlA0i58FYZozJ8o7YcE2Rbf8rUku2YHIt7L8EEFv9LqHEpxjazuwMxAwFvdIeaEfwPd20U9_VYepKryrHObr7lyo2p0hlEsIBLMWNXjN1eFb4yOz4Ch9auOa7" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="480" /></span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /><span style="font-family: "arial"; white-space: pre-wrap;">You can see how these trends impacted the market by looking at this chart:</span></span></b><br />
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="288" src="https://lh3.googleusercontent.com/1G3vVh_hn2afHTNcGJL1bUmbciqoCCENR5dnIz-NMgDRZLluMJ0s3Xp6JXkgurHPvH5-eWrnEl3C7nK6h1HyJgRg9YV2hc57gOR4FSEBKgiQP4Pf8Ep5OJ9T5KzcmXamdwneE3rM" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="480" /></span></span><br />
<span style="font-family: "arial"; font-size: large; white-space: pre-wrap;">LIBOR and commercial paper rates underperformed OIS starting in December, but flattened out in January. Similarly, 3m t-bill rates and OIS followed each other very closely until the t-bill issuance accelerated sharply in February. </span><br />
<span style="font-family: "arial"; font-size: large; white-space: pre-wrap;"><br /></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">At that point all bets were off--with CP rates and t-bill rates widening amid weakening credit markets and an decrease in dollar funding supply, LIBOR started to underperform everything, since panel banks saw that issuance concessions were back and weaker panelists probably had to pay up to get deals done. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">The rest, as they say, is history. </span></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Where does the market stand now? Pretty nervous, to say the least. 3mo/3mo forward (June fra/ois) blew out to new wides last week, and the 6m3m (Sept fra/ois) is again skulking around the 40 level. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="280" src="https://lh4.googleusercontent.com/IlQbSgwZZNYiTvKhj5ZCIWwjkU_PF0Vls9DETXnnr8smIbawyiKk1IqAHBViriq6xFn_wCRwm6YyyCm9HErHvDhcVvFPukjbxCaa20mp6DqqCoSwQ8-HddjkfFVzPdk7CBp1kJzZ" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">This seems like the capitulation move here--L/OIS over 50….<b>money market investors are going to look at that and say this is where we can step in, and there is already some evidence this is happening.</b> I continue to believe that the market will stabilize in the low-mid 30s and we’ll see a return of a more normal looking upward sloping term structure. But when? That’s the big question I guess--however you look to structure this trade, it will be worth considering how much carry and resilience it built into the trade. </span></span><br />
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<span style="font-size: large;">Shawn</span><br />
<a href="mailto:TeamMacroMan@gmail.com"><span style="font-size: large;">TeamMacroMan2@gmail.com</span></a><br />
<a href="https://twitter.com/EMinflationista" target="_blank"><span style="font-size: large;">@EMInflationista</span></a></div>
EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com97tag:blogger.com,1999:blog-34323687.post-30350893448264416212018-03-08T05:02:00.002+00:002018-04-14T02:15:08.577+01:00CAD and NAFTA Risk: Show Me The Money<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Part of the genesis of this blog is to provide a historical record of trade ideas, and just as important, the justification behind them. And looking back now, it appears I like to talk about CAD, which is strange since I really never traded it all that often. </span></span></div>
<b id="docs-internal-guid-7552418b-03f9-7c42-13c1-1ed6a24daa77" style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">The loonie has gotten kicked around the past month or so, ending in this brilliant Twitter post: </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="302" src="https://lh6.googleusercontent.com/2YR2qG61ZjlSoq3MepfVPl_4YDkxNFZ_yQ49mvcenjXnTnVpQXKUcEHTJHfXV3bIum_yoo2jJIeZlGJgkwvh1PI66VNJ02tyzI2qi_HUY8_uXRgbzPrz-d8YAFl82stOdaE6I4EY" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="468" /></span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Every currency should be represented by some kind of animal so we can have more of this. </span></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Then the super-quants chimed in...Jens Nordvig’s Exante Data posted this today: </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="486" src="https://lh3.googleusercontent.com/2cV8weMi72uA_zwjz7Nx8D6DJ-1-9uc4briDmj3-D68AG8CJe5DaGpnQUJfBsPwUpREPghVyh6TH2lLVHdR1RyQQcJX5nxprm1mCq-8vkF1O8drQ6XSc0OV-9z_IKXGNq4FJ4_kb" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="492" /></span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">That got the wheels turning….first, is CAD really underperforming, and if so, is it underperforming because of amorphous residual factors that one could call collective “NAFTA risk” rather than more discernible ones? Let’s go to the facts. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">First, if we look at a pack of commodity currencies over the past year, CAD falls nicely in the middle of the range. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="280" src="https://lh4.googleusercontent.com/lbx6HG-9v9koEl4m6eMCH3w5MOmPBaB6B774x1RSb8wR0--rAoEGus-NZruovsR0Qa0w5JFfB4RMxKLLq-ASwTj0SSh_kIFxt2K0T9BxpI6bK_Tr7H8k3_P2fE6jjIlZxDHABALu" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">On a shorter time scale, the underperformance is more apparent. Since the beginning of the year CAD can’t get out of its own way...but it really started to trade ugly around the end of January. This is where the “NAFTA risk” story breaks down. No chance MXN is at the top of this performance table if the risk of a NAFTA blow up were increasing. Indeed, as I highlighted last week, if anything MXN is arguably pricing in significant political risks as well--leading me to assume there is little if any NAFTA risk priced into either MXN or CAD. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="479" src="https://lh5.googleusercontent.com/OW_X-XiSFnFGsE07DPmfuEqrFuiYzJS8IdbVFhkDGd5DS4IVKTpaMhdwZxzbev07VRY0OZ_Jrstqhsc60plqyZDYyiqiztrQszpGxG9lu3Zvrq8R0c5HSVkZdvfq4VTORiELHREx" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">So where does that leave CAD? I can’t compete with the sentient machine learning models at Exante Data, but I can come up with a crude regression model of my own, which is like comparing a Bugatti to a go-cart built with scavenged lawn mower parts. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Borrowing from some inputs and ideas in the JP Morgan model, I modeled up CAD against oil, 1y1y CAD-USD rate spreads, and S&P vol. </span></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="300" src="https://lh5.googleusercontent.com/UpGYPy9Gq2NDVYHLVzBstEjcdRPr77uoLu4dlaGp3eGVEa_PpX0Hv5Ggq6nvKi2yiPkBXBSCsjAG7o9fkoFTvWGlV7VbQyKzicAEsCGU4G6qrUNoDsGmDY_hsB9Liz9mN8f2sQcI" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">The takeaway I get from this is that the blowup in vol and the pullback in equity risk has taken significant air out of the tires for CAD...the model value for CAD rose from 1.24 to 1.32 in a short period of time...and spot was slow to catch up. When it got moving, traders didn’t waste any time in gunning it towards 1.30. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">But was it just the equity selloff at work? Turns out the data played a part too--this chart is the Barclays economic data surprise indexes for the US and Canada. The Canadian index craters throughout February, while the US index chops around a more narrow range. When combined with higher equity (and currency) vol and lower stock prices, it’s a clear trigger for traders that had done well holding long CAD positions throughout 2017 to hit the exits.</span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="324" src="https://lh5.googleusercontent.com/pHQoQ46gakaYSi1T72rnZiiM6n4Vt1Xta8yf73ZfpC5mH6DHJtHMoXirC7vNTKJkGy51TLuSHBAAUy7oI5At4wUGqpIYh25zE67ORXaYWEJ7lfDa_1okReyC7PRDfjVHK8HPykW8" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Similarly, in the rates space, there was some change in pricing the BoC hiking cycle but nothing earth-shattering. On January 25, this is what was priced in. a y/e 2018 rate of 1.84%. </span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="332" src="https://lh4.googleusercontent.com/-CYfte227tUHcyDH71jbspNlrSB5QvxaTvUsq9UWMQ22uRF6xIvsfAqa-3yKwlFd3Ryqs21ro_ePpstJPgSMYVJTSN09vrnXyP5cfPM23iRAlditUfDvJBm0yaOYS99WFGSCWl3a" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="497" /></span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Today that rate is 1.74%. </span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="320" src="https://lh6.googleusercontent.com/PjeJAuQLSM3dAMXQ5Ybd7JP_g9w0q4k7_VcdleVL9sRLEAPrPYrMcMeGorS5AGli0Um_-Z78hwh1NwlaOOBs7KDBkg3iB429UUndTxUaUoNvB8ZT5ZyOVC3SfoE8rJOGxXZjSbVB" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="606" /></span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Does 10bps in the front end equate to a 4-5% underperformance in the currency relative to other commodity currencies? That sounds a bit much to me, but it points to the overall trend that the weakness in the currency is being driven by a reversal in short-term economic indicators rather than the “residual”--NAFTA risk, political risk, or the risk </span><a href="http://nationalpost.com/news/canada/no-internet-fidel-castro-isnt-trudeaus-real-father-the-canadian-prime-minister-just-really-really-looks-like-him" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Justin Trudeau is in fact the spawn of Fidel Castro. </span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Did the Trump tariff news play a role here? Doesn’t look like it to me--the bulk of the underperformance was prior to that, but ya never know. It would be reasonable to use that as the explanatory variable to support underperformance relative to MXN, but the data isn’t there to support that. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Currency trading is about much more than interest rate spreads and current account deficits. At its most basic level, it is about the relative rate of return in different economies….and in this case when the short-vol/equity momentum finally broke down (at least in its previous iteration), it signaled a break in potential growth rates in Canada, and combined with some additional macro-prudential measures to soften the real estate market, it took a good deal of the shine out of CAD. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Bottom line, when you look at a mean-reversion in what had been a very strong run of economic data, the underperformance relative to MXN, and a regression analysis that makes the recent weakness in CAD look more in line with the fundamentals--there isn’t as much to panic about. </span></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">What’s next for CAD? It seems like the market is on to something here, and there is good evidence that the business cycle is looking rather tired, despite a </span><a href="http://iveypmi.uwo.ca/" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">strong print from the Ivey PMI </span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">earlier this week. That said, my gut says the market seems to have gotten a bit offside here, pushing CAD too much relative to the underlying drivers. Despite the naysayers I think the weak USD trade is intact, so I’m inclined to catch the knife here and sell usd/cad, but just can’t get too excited about it so long as it continues to screen marginally rich on my regression model and the model inputs continue to point towards a weaker currency. </span></span></div>
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<span style="font-size: large;">Shawn</span><br />
<a href="mailto:TeamMacroMan@gmail.com"><span style="font-size: large;">TeamMacroMan2@gmail.com</span></a><br />
<a href="https://twitter.com/EMinflationista" target="_blank"><span style="font-size: large;">@EMInflationista</span></a></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre;"><br /></span></div>
EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com48tag:blogger.com,1999:blog-34323687.post-24842708780423540022018-03-02T21:13:00.001+00:002018-04-14T02:14:58.749+01:00Why is LIBOR Moving Higher?<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="401" src="https://lh4.googleusercontent.com/qU12hMBouRnnG4xuy2ejGJ3kiomrYnkuQWimVV4jcfTls9dNrPGgKFqNJrhD-0CPmkaTArAQ_K69aT_wQ09-Jz5Tsz-_y5MXb3NeIbNWuVhZph3o6jJW6-k52UhHepmTTOAL-y8s" style="border: none; transform: rotate(0rad);" width="640" /></span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Indeed, volatility is back. BTD may not be dead, and as I have mentioned here, I’m not convinced the bull market is dead and spoos are heading back to 2000 (yet). However, the systematic gamma sellers have taken a serious beating--and one that doesn’t seem to want to let up. </span></span></div>
<b id="docs-internal-guid-a1d5e973-e88d-0bc1-5099-efd59b09f585" style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Beyond a couple of bullet point sized comments, I’ll again leave it to the peanut gallery to advance the discussion on where markets are going in the next couple of weeks. My take on the steel tariff move by Trump is that it is not a game changer for the economy at large but was designed by the administration’s trade negotiators as a tactic to make them look more serious in negotiations with China and NAFTA. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">A lot of people ask me, “As a bond trader, what do you do?” Well ok, I guess nobody has ever asked me that. If fact, I find that most friends and family are pretty happy to not know what I do at all. But in the US fixed income world, one of the big asset classes is LIBOR spreads. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">These trades can take on all kinds of forms, where you can bet on (or hedge) the spread between LIBOR and OIS, LIBOR and Treasury rates, or the individual components of LIBOR (1mo vs. 3mo, or 3mo vs. 6mo fixings, etc.). The people looking to hedge are often banks with various tenors of floating loans they want to match up, or asset managers that want to switch their liabilities from one benchmark (say, LIBOR) to another (like OIS).</span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Theoretically, LIBOR rates are the rate at which banks lend to each other, but nobody really does that any more. Today this rate is often set by bankers with an algorithm that takes into account various credit-driven short-term funding markets like repo, commercial paper and cross currency swaps. When credit tightens up, bank balance sheets contract, and/or capital leaves the market at large, these rates move higher relative to OIS, which is and overnight rate indexed to the fed funds rate that is more or less controlled by FOMC policy. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">If the market is really scared--to the point where there is some question about the viability of the banks that are holding all of this credit risk and collateral for clients, LIBOR blows out to extreme levels. This is what happened in 2008-2009 and 2011-2012 during the GFC and European sovereign debt crisis. More prosaic spread widenings have occurred recently around the taper tantrum, China deval in 2015 and early 2016, and Brexit in 2016.</span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">By contrast, these spreads contract when the market believes there will be more money to lend, which drives down interest rates. This is exactly what happened after Trump’s victory in the US election. After years or tightening balance sheets in reaction to Dodd-Frank regulations and a variety of Basel II reforms designed to increase bank capital, banks had less free capital to lend. When Trump won, his pronouncements about cutting regulations were seen as freeing up capital for banks to start lending again.</span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">“Risk on” and tightening credit spreads didn’t hurt either. In mid-2017, the spot 3mo LIBOR/OIS spread went from the mid-30s to the teens, while forward spreads fell by 10-15bps too. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="300" src="https://lh5.googleusercontent.com/s-7SRXKmuJpr1WWSWqvnN6hQrOEMZv1_e6d5QD6k44iLat1J-Imyifm0xbT-ke2u8FQXZzgVv7e_m-dSiQ9dFSOvkxO57OCWh0QoZZ0SKgAJxEzyzN9ti22bFTBQ9aZo36hDrj97" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="529" /></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: x-small;"><i>(Source: JP Morgan data; note: I used a 5-day MVA here to make the chart less noisy)</i></span></span><br />
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><br /></span></span>
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">This trend reversed in style starting in December, when LIBOR fixings started to trend higher, taking all of the forward basis levels up with it. What happened?</span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">The answer lies in deep in the plumbing of the financial system. Back in December, two big things happened to impact short term funding markets: </span></span></div>
<ol style="margin-bottom: 0pt; margin-top: 0pt;">
<li dir="ltr" style="background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; list-style-type: decimal; text-decoration: none; vertical-align: baseline; white-space: pre;"><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Trump and congress passed the tax reform bill. This gave many corporations with dollar assets offshore the incentive to repatriate those dollars and use them for share buybacks, dividends or M&A. The loss of that supply of dollars to lend out caused lending rates to increase, </span></span></div>
</li>
<li dir="ltr" style="background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; list-style-type: decimal; text-decoration: none; vertical-align: baseline; white-space: pre;"><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">In the same tax reform, and in the subsequent budget deal with Democrats, the US decided to borrow more money. A lot more money. This will cause a big increase in t-bill supply, which will have the end effect of crowding out private borrowing--or at least causing the demand curve to shift to the right, also leading to higher borrowing rates. </span></span></div>
</li>
</ol>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">For most of 2017, 3mo t-bill rates had been stable around 10bps tighter than OIS. Since the budget deal, that spread has moved 10-12bps wider. LIBOR has moved even wider, essentially taking in the impact of both the t-bill supply and the corporate foreign earnings repatriation. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">We’ve seen the impact in commercial paper and repo rates as well: </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="288" src="https://lh6.googleusercontent.com/pvtvUyJnFRBepSTEGXYvrMZDtz6xFnbQtJq8e_aTlhiGyTlvHKWaKAI7pLuHtdhht66NcLbxrTQH6pxCN2rSiCRCJjAiLVcjxX-NBbJy5KRCGZv6tccz-pH1N04UXKtoUpGlNXJ1" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="481" /></span></span></div>
<b style="font-weight: normal;"><span style="font-size: x-small;"><i>(Source: JP Morgan data)</i></span></b><br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">We’ve seen cross currency basis (the deviation between covered interest rate parity and where one can borrow or lend in USD in currency forward markets) has tightened as well, although not dramatically. The sum impact of these factors means LIBOR fixings are moving higher not because of any stress to the banking system, but because there is a greater shortage of USD funding, and fears of greater supply are forcing treasuries to cheapen.</span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">In the end, I see the funding factor (offshore profit repatriation) and the supply factor (more t-bills) each having widened short-term funding rates by roughly 10bps--other measures that indicate pure (or more pure, anyway) expressions of bank credit risk (like 3mo/6mo LIBOR basis) are showing very little movement, despite the pullback in equity markets the past few weeks. That tells me this move is all about USD supply and t-bill issuance. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Where do these markets go from here? Here is a cleaner look at the LIBOR/ois forward markets relative to “spot”:</span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="389" src="https://lh4.googleusercontent.com/iuFoYep-Wvpkcqx2rFY34qSQB1pc7_mInySsSvP50VSdwUtUsMgKokD8z9lRrEU83KLabUz6HynCDcVQnHZ-7GjFOxDlyX5m_22S_ZK9JL30WSrmpZLfXusD1YjCmM20fesuDmAa" style="border: none; transform: rotate(0rad);" width="624" /></span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Put another way, the market is pricing a significant tightening in the LIBOR/OIS spread one year forward. 1y1y LIBOR/OIS is trading 5-8bps higher than it was for most of 2017. (Note also here that the market was set up for part of this move--presumably the offshore profits repatriation, but was caught with its pants down in the budget deal.) That order of magnitude looks about right to me--clearly hedge funds stepped into this trade in size this week. From these levels, I would look to pay forwards 2-3 years out vs. receiving front-end FRA/OIS (the short-term version of this trade in eurodollars), on the idea that 1) inversions in this curve are very rare, 2) there is no sign of credit stress, and in fact, short-term funding rates could subside soon as <a href="https://www.bloomberg.com/news/articles/2018-01-19/fed-said-to-be-finishing-proposal-to-ease-up-on-bank-leverage" target="_blank">the Fed moves to reduce leverage limits for the banks</a>, but 3) the long-term fiscal impact of the t-bill supply will likely be ongoing, and maybe worsen if the economy slows down and/or if credit markets weaken. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">If you made it this far, you are either a basis junkie or you win the medal for getting through Professor MacroShawn’s Funding Markets 101 class. Either way, kick back with a Friday afternoon happy hour beverage of your choice. You deserve it.</span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Have a good weekend! </span></span></div>
<span style="font-size: large;"><br /></span>
<span style="font-size: large;">Shawn</span><br />
<a href="mailto:TeamMacroMan@gmail.com"><span style="font-size: large;">TeamMacroMan2@gmail.com</span></a><br />
<span style="font-size: large;"></span><br />
<a href="https://twitter.com/EMinflationista" target="_blank"><span style="font-size: large;">@EMInflationista</span></a>EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com29tag:blogger.com,1999:blog-34323687.post-13860510131227024612018-03-01T15:43:00.000+00:002018-03-01T15:43:05.767+00:00Major Europe FX Pairs On The Precipice.....The CTA Nightmare To ContinueAs the dust settles from the saber-rattling equities move of ~11% (shocking to some), many CTA's are attempting to lick their wounds and regroup for a profitable rest of the year.<br />
<br />
As they proceed down this path, there are a few other trend-following trades that are on the precipice of reverse and could prove to be obstacles to these funds' Pnls.<br />
<br />
I believe we are near a meaningful reversal in the dollar versus developed Europe, namely EUR, GBP, and CHF.<br />
<br />
<i><br /></i> <i>How did we get here?</i><br />
<i><br /></i> Well, back in 2017 I was a proponent for the major European currencies. I spoke extensively about <a href="http://macro-man.blogspot.com/2017/03/carney-cable-guy.html"><span style="color: blue;">GBP based on rate differentials here</span></a>, as well as <a href="http://macro-man.blogspot.com/2017/05/forgot-about-eur.html"><span style="color: blue;">EUR in a few posts here</span></a> and <a href="http://macro-man.blogspot.com/2017/04/sunday-funday-french-election.html"><span style="color: blue;">here</span></a>. Although were drivers in the currencies above, just as importantly was the dollar move that materialized after that time.<br />
<br />
It was around this time last year. Trump went around saying he wanted a weaker dollar. We had headlines like this:<br />
<i><a href="https://www.cbsnews.com/news/trump-dollar-strong-trade-wall-street/"><span style="color: blue;"><br /></span></a></i> <i><a href="https://www.cbsnews.com/news/trump-dollar-strong-trade-wall-street/"><span style="color: blue;">Trump says the dollar is "too strong" -- good luck weakening it</span></a></i><br />
<div>
<br /></div>
<div>
Well, it turned out that he actually had pretty good "luck", since that turned out to be a major top in the dollar.</div>
<div>
<br /></div>
<div>
<br /></div>
<div>
<i>Where are we now?</i></div>
<br />
Today, it seems that the unrelenting move in EUR and GBP has promoted participants to pile in on the long side for a number of reasons that could be broadly grouped together as the following:<br />
<br />
1) Prospect of renormalization in monetary policies of non-US countries<br />
2) Shifts in reserve policies in non-US countries<br />
3) Higher beta to global growth in non-US countries<br />
<br />
This line of reasoning and speculative FX market positioning has stretched so much that participants have hypothesized that things like interest rate differentials no longer work!<br />
<br />
Yes, interest rate differentials as a signal for trading currencies go through prolonged periods of "working" and "not working" (my friend Goofy Man from a large macro hedge fund noted that 2004-2006 was a period when interest rate differentials did not "work").<br />
<br />
However, we are at a point where I think the markets have over-anticipated and other fundamental factors beneath the surface of price action can trigger a reversal.<br />
<br />
First, let's talk about rate differentials.<br />
<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiLSXz43Y67OcHqhk0mY4BzHYAB5zbxqPFKijKqN6SHnuAmTU6VJJjpDTVO_LYBbdDQFaKevVbDP6F2t1hEMfYBLyDekFVUX9vSPdNMJ4NkTz7evMacSQeWus1gHSeJdXBH4RiX/s1600/20180227+2yr+Rates.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="339" data-original-width="1600" height="135" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiLSXz43Y67OcHqhk0mY4BzHYAB5zbxqPFKijKqN6SHnuAmTU6VJJjpDTVO_LYBbdDQFaKevVbDP6F2t1hEMfYBLyDekFVUX9vSPdNMJ4NkTz7evMacSQeWus1gHSeJdXBH4RiX/s640/20180227+2yr+Rates.JPG" width="640" /></a></div>
2yr notes in the US, UK, and Germany.<br />
<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhaqbOSI85oqZIblWxklks9hLhvk7FqJcbLVXYw0WlKaAWK8mYXVPHZ89r-8gX67SPzEiOJhz-UoNWA84YtQUFx3GzQK4B4CAH52TtK9cqlGyaaayiNj-dmHmPmwacdCiTdKU_9/s1600/20180227+USD+vs+CHF+Swap+Rates.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="459" data-original-width="1600" height="182" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhaqbOSI85oqZIblWxklks9hLhvk7FqJcbLVXYw0WlKaAWK8mYXVPHZ89r-8gX67SPzEiOJhz-UoNWA84YtQUFx3GzQK4B4CAH52TtK9cqlGyaaayiNj-dmHmPmwacdCiTdKU_9/s640/20180227+USD+vs+CHF+Swap+Rates.JPG" width="640" /></a></div>
2yr swap rates in USD and CHF IRS.<br />
<br />
Clearly, we see that rate differential in nominal terms has been stretched. In addition, FX cares even more about real rate differentials, which roughly reflect the same pattern, but could serve to explain why this phenomenon has failed to impact things until now.<br />
<br />
Next, let's talk about policy.<br />
<br />
When we look at some of these other central banks, we hear a somewhat similar, yet importantly different tone.<br />
<i><br /></i>
<i>ECB:</i><br />
As late as last week, the ECB stated that it was too early to review policy and that the latest it would even consider revisiting policy would be sometime "early this year".<br />
<br />
As with most central banks, the surprise the world and rip rates mantra no longer exists and what we have in place these days is the announce, announce, and announce until finally ticking rates up at the slowest possible pace. So reasonable to say, the market has over-anticipated a bit here.<br />
<br />
They've also expressed their intent on <b style="font-style: italic;">not </b>targeting the exchange rate.<br />
<br />
<i>BOE:</i><br />
We know they came out last month and stated that they could be moving on policy changes more swiftly than previously thought (<a href="https://macro-man.blogspot.com/2017/03/carney-cable-guy.html"><span style="color: blue;">This was what I was looking for last year</span></a>). There was a nice pop for GBP on the news. Now that the cat's out of the bag, we need to think about what they might do going forward.<br />
<br />
As our very own Macro Man has documented, the BOE's flip-floppy nature, so that could be a risk.<br />
<br />
Tying that to the price action - we have seen that GBP topped out right around that announcement. Not exactly a good harbinger for GBPUSD.<br />
<br />
With that said, it is still important to keep in mind that trade-weighted GBP still looks cheap.<br />
<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjo9pgJ9lxvNVexnFd8mueRf5uZX2jGKB38z6bGxB3tSQKxSDEYJnusyShpd2vbgXh3dDnA_AzKe2r48wW_lftfcNH4QT380QJWNhJmrvh-ZuqPCMFhvcmUEfXGqCQ1Jx19JoXm/s1600/20180227+Trade+Weighted+GBP.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="504" data-original-width="792" height="406" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjo9pgJ9lxvNVexnFd8mueRf5uZX2jGKB38z6bGxB3tSQKxSDEYJnusyShpd2vbgXh3dDnA_AzKe2r48wW_lftfcNH4QT380QJWNhJmrvh-ZuqPCMFhvcmUEfXGqCQ1Jx19JoXm/s640/20180227+Trade+Weighted+GBP.JPG" width="640" /></a></div>
<br />
<i>SNB:</i><br />
The SNB has not shown clear signs of tapering yet. Not only that, they are trying to invest in stocks (sign of the times in 2018). Thus, the appreciation of CHF versus the dollar is probably not sustainable.<br />
<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhO9AUrF5X6GMqJEjbLi4oMrov5ECTASdahktL5scoEbOT0VVpHe5ZRVNK7p0T79yNI6ODVAcnEaherB8yLZ1fq02vbUdJbaWBESTJ_QKlPkNSj_HGsBxtYDO80RDPKnEhzu2hS/s1600/20180301+SNB+Balance+Sheet.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="1185" data-original-width="1600" height="474" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhO9AUrF5X6GMqJEjbLi4oMrov5ECTASdahktL5scoEbOT0VVpHe5ZRVNK7p0T79yNI6ODVAcnEaherB8yLZ1fq02vbUdJbaWBESTJ_QKlPkNSj_HGsBxtYDO80RDPKnEhzu2hS/s640/20180301+SNB+Balance+Sheet.png" width="640" /></a></div>
<br />
<i><br /></i>
<i>The Fed:</i><br />
Lastly, thinking about the dollar leg.<br />
<br />
We had the latest Fed minutes last week and Powell speak recently. They have made it abundantly evident that the Fed will do it's best to maintain it's attempt to continue its pace of hiking.<br />
<br />
Breakevens have slowly started building a head of steam. There are enough stories delineating the tax cuts. I've detailed some of Trump's <a href="https://macro-man.blogspot.com/2017/06/trumps-fed_14.html"><span style="color: blue;">Fed choices in the past here</span></a>. It is clear that we are starting to get a hawkish Fed. Shawn has <a href="http://macro-man.blogspot.com/2018/02/powells-first-dance-with-congress.html"><span style="color: blue;">recently put up details regarding some evidence of J-Powell's intents</span></a>.<br />
<br />
Finally, there's my favorite indicator - Jay Powell's height - he's over 6 foot!!<br />
<br />
And a picture is worth a thousand words:<br />
<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhPPXFY5BgZ9IoM3F5LPPWD81ZC8xilLQ0NSUxmMl6uR5Q0NBohQFZcVDygCeB4-mkdgR-MOpIGzUzXNeihWmDcwbm_NjVEA-FvyrG3GD79QPHMI_HEFcfY7mtJkYdrbcAPKSMO/s1600/20180301+Fed+Chair+Heights.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="508" data-original-width="888" height="366" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhPPXFY5BgZ9IoM3F5LPPWD81ZC8xilLQ0NSUxmMl6uR5Q0NBohQFZcVDygCeB4-mkdgR-MOpIGzUzXNeihWmDcwbm_NjVEA-FvyrG3GD79QPHMI_HEFcfY7mtJkYdrbcAPKSMO/s640/20180301+Fed+Chair+Heights.PNG" width="640" /></a></div>
<br />
Finally, let's talk about Donald Trump who seemingly always does his best (whether intentionally or unintentionally) to keep things interesting.<br />
<br />
Unlike this time last year, he and Steve Mnuchin has come out and said that they want the dollar stronger from these levels.<br />
<br />
<a href="https://www.reuters.com/article/us-davos-meeting-trump-dollar/trump-says-he-wants-strong-dollar-cnbc-interview-idUSKBN1FE2TK"><span style="color: blue;">Here</span></a> and <a href="https://www.bloomberg.com/news/articles/2018-01-30/mnuchin-says-his-dollar-policy-isn-t-aimed-at-jawboning-it-lower"><span style="color: blue;">here</span></a>, etc.<br />
<br />
Ironically, the market once again fails to pay attention to the most important man in America as he explicitly states his goals and intent (look, no mystery here).<br />
<br />
With this combination of reasons in mind, I now turn to the dollar chart (using DXY as a proxy - which is mainly composed of EUR, JPY, GBP, and CHF)<br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgDaUN4uB1iQ89Vl8yNPQ35nQMa82Jdm3PEViFQGravy5DsU93Kg3hyphenhyphen84T7PB9_Kx2XMnshgaJB9CWWe7QNUvZ2xpXCvMsFR1O-NQ1AmQFvjCvSSiJf-x0hBUnIPzFDIFuWupWR/s1600/20180227+DXY.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="586" data-original-width="1273" height="292" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgDaUN4uB1iQ89Vl8yNPQ35nQMa82Jdm3PEViFQGravy5DsU93Kg3hyphenhyphen84T7PB9_Kx2XMnshgaJB9CWWe7QNUvZ2xpXCvMsFR1O-NQ1AmQFvjCvSSiJf-x0hBUnIPzFDIFuWupWR/s640/20180227+DXY.JPG" width="640" /></a></div>
<br />
Looks pretty clear to me that it is looking for a bottom. From this one should be able to construct clear entry and stop levels to either take profits if you've been riding the trend or to get into a speculative long position.<br />
<br />
This has been such a persistent move for G10 currencies, it will be hard to see CTA's getting out of the way of this one.<br />
<br />
And for the rest of us, good huntin'.<br />
<br />
<br />Macro Clownhttp://www.blogger.com/profile/17196568155114537578noreply@blogger.com21tag:blogger.com,1999:blog-34323687.post-20471430050970588522018-02-28T20:01:00.003+00:002018-04-14T02:14:40.922+01:00Powell's First Dance with Congress: Hawkish. <div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">I guess I’m not much of a Fed watcher. There’s something I don’t like about the Kremlinology aspect of parsing a Fed governors words. Sell side economists, financial media, and no small amount of fin-twitter opine on every speech as if it is potentially a game changer for monetary policy, rates, and the value of the dollar. However, when you have a new chairman of the Fed, it pays to sit down and listen to the guy for his first speech in front of congress, because he is going to bring his own style to the proceedings--and ya never know….maybe some new substance. </span></span></div>
<b id="docs-internal-guid-a339f40f-de00-7207-08c2-fc50382d38f4" style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">So this passage stood out: </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">“</span><span style="background-color: white; color: black; font-family: "georgia"; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">In gauging the appropriate path for monetary policy over the next few years, the FOMC will continue to strike a balance between </span><span style="background-color: white; color: black; font-family: "georgia"; font-style: italic; font-variant: normal; font-weight: 700; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">avoiding an overheated economy</span><span style="background-color: white; color: black; font-family: "georgia"; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> and bringing PCE price inflation to 2 percent on a sustained basis.” </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">I can’t remember the last time a Fed chairman used the words “overheated economy”, and the unequivocal statement that they will manage monetary policy is such a way to avoid it. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">What is more peculiar about this statement is not just the hawkish implications--but the clear implication that the level of PCE price inflation is potentially mutually exclusive from an overheated economy. When you consider that in the context of a dual mandate--it illustrates what I think is a big trend in central banks around the world since the financial crisis: There is a stealth mandate to maintain financial stability, or at the very least an implicit one embedded in the stated mandate of all central banks. </span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"> </span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">What does that mean for the hiking cycle, and for rates at large? Clearly it is hawkish. It is also argues that Powell is looking at: </span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">1) an economy at full employment, </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">2) inflation somewhat convincingly, but not conclusively, ticking higher, </span></span></div>
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<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">3) higher commodity prices ( mandate is HEADLINE inflation, not core...so this matters, even if they don’t say so), </span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 700; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">but also importantly</span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">4) a government that is bound and determined to borrow and spend money like a drunken sailor on leave, </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">5a) financial conditions at increasingly easy levels, 5b) credit growth starting to tick up, and 5c) financial markets showing some signs of froth, reaching for risk, etc. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Add those factors to a Federal Reserve that has the institutional memory of a financial system that exploded at the end of a three year hiking cycle, despite modest upticks in inflation, and you can paint a picture of a chairman that might look to be more aggressive in reigning in excess than his predecessors--even if the past several years of central bank policy history seem to imply that monetary authorities shouldn’t pump the brakes too fast as economies recover and financial markets recapitalize. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Which leads us back to what we all really care about, WIPI. What Is Priced In?</span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">The Powell testimony put paid to the front end again….but took levels pretty much in line with “the dots”: </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="295" src="https://lh4.googleusercontent.com/o6rZ8sN9dOnFW-ZDn3X8iild1qWH7dmjlPSGBYuHl2zM7uoSyOL2YevtuYCOGT9IlKiM3wvXMEnb0_2veobTaU8lO9SbEuyuHxdxSLbq7EcbqxTCRDk4g9tboWLyHliP1MN9XW_2" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="499" /></span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">75bps this year….yes three hikes, on the screws with what was in the December SEP. But the cycle peters out after that, with roughly 30bps priced in for 2019. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Here is a mockup of the impact from Powell’s speech, using 3m OIS rates at various forward tenors. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="280" src="https://lh6.googleusercontent.com/9T7GhylauebaiL_2uM0HWI-6qxo2XnhChkrkjsZsOOIifNzvRITvHA5mMCqbIhfKaCCFT8Br3M8KqLGsqDbAKQdGLh8o2dYGF7e8UkEmsnVsl6XP9RUqSD1hZYcxaKAb9W85dg_K" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">More simply, the front end 3m rates were far more stable than the 3m rates one year, two years and five years in the future. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><br /></span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">It’s a bear steepener in the front end--but consistent with the type of policy shifts that can put a bid into the long bond--higher front rates amid stable long-term flows. And looking at the outright levels of those 3m forward rates, the levels five years out-somewhat consistent with where the market’s estimation of a “neutral rate” might be-- are only just now reaching that seemed sorta normal-ish between 2011 and 2014. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="280" src="https://lh5.googleusercontent.com/NErg2HDtElO5Qm0pNoVg6zv4LpiucCgka-z8GK1V213_TScpMzQcyS9UcWcSu5Zww27S3R-biE-A-xueA7sXIx8jriaOI2JTilmTGaZY-Sv35dQb8Y69xA1tHBYNAGbOaPYJrdrq" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Bottom line, the market isn’t counting on a bear steepening in the front end relative to the belly of the curve, but the combination of fiscal stimulus, high commodity prices and a hawkish FOMC chairman might just do it---and shepherding the curve slowly but surely in that in that direction might be the best way for Powell to let some air out of this balloon global central banks inflated over the past decade. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="280" src="https://lh6.googleusercontent.com/68z499XPGBRk0TauZrnTxH7WjDcsjAI6ne6LFQCZi5_anpafzls7T4iSmDSnRndyjDDSgZrt0E0RBlri8CW2i-RFYXZLCvojuLoqt41KKluR17kyFpSoK1KW_dK2Wzw3lLgkz5y8" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">2y/5y OIS is sitting at 25bps--unless Powell moves decisively towards four hikes this year, the market might shift towards higher rates later rather than sooner...especially if it is appearing that wages are taking more time to accelerate than many seem to expect. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Yeah, I know….US economic data is already starting to tail off...commodities have seemed to find a level here...and yes, maybe there is something to the impact of higher rates on the housing market. And I believe the most convincing argument in favor of lower rates from these levels is the unwavering commitment of the ECB and BoJ to keep rates right where they are. Suddenly nearly 3% in dollars doesn’t sound so bad. As such I don’t think the long bond is going to far. But when the long-term neutral ex-ante real rate is at 50bps, there is still room for that to move higher. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Why did I use OIS rates here? I wanted a clean picture of Fed-implied policy rates since LIBOR and swap spreads have undergone some big policy-driven changes over the past couple of months...who said US rates are boring!! Stay tuned for more on that subject on Friday. </span></span><br />
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><br /></span></span></div>
<span style="font-size: large;">Shawn</span><br />
<a href="mailto:TeamMacroMan@gmail.com"><span style="font-size: large;">TeamMacroMan2@gmail.com</span></a><br />
<a href="https://twitter.com/EMinflationista" target="_blank"><span style="font-size: large;">@EMInflationista</span></a><br />
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EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com20tag:blogger.com,1999:blog-34323687.post-41768405862261809612018-02-27T17:00:00.001+00:002018-04-14T02:14:28.329+01:00Is This Peak AMLO? <span style="font-size: large;"><br /></span>
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<span style="font-family: "arial"; white-space: pre-wrap;">(UPDATE: I initially posted this on February 27, but it was missing the Peru 2011 analysis and more depth on the potential downside of an AMLO victory. What follows is the edited and updated version I re-posted on March 1)</span><br />
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<span style="font-family: "arial"; white-space: pre-wrap;"><span style="font-size: large;">After broaching <a href="http://macro-man.blogspot.com/2018/02/musings-on-mexicos-presidential.html" target="_blank">the subject in a post last week</a>, I've been wrestling with how to think about, and price, Mexico political risk. After spending some time digging through more polls and recent electoral history, I want to give you folks a quick walk through the details of how I will be thinking about the Mexican presidential election in 2018, and my admittedly cursory attempt to model the market’s implied probability of a victory for Andres Manuel Lopez Obrador--AMLO.</span></span></div>
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<b id="docs-internal-guid-59d23e6f-e27f-efd6-8d58-a6b10b75112d" style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">First, let’s look back at the US election in in the summer of 2016, which was a similar stage to where Mexico is now. Before the conventions in July, Hillary led by 5-8 points.</span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="385" src="https://lh4.googleusercontent.com/McMk5J7VW3FLTv1_kXlYazvmsXgSJ6jigUEFx0F_VJZnTRlpZW4Gn3RFZhvNHO3-uex1KzCaAHj9FbU_mhGdLrNjmTOldA6i9rpE2j0zOU_9U1yvud8RqyrNt9td7cSzwiACWbKN" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="533" /></span></span></div>
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<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">According to the folks at</span><a href="https://projects.fivethirtyeight.com/2016-election-forecast/" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;"> fivethirtyeight.com</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> and most prediction markets (</span><a href="https://iemweb.biz.uiowa.edu/graphs/graph_Pres16_WTA.cfm" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">this chart is from my old friends at the Iowa Electronic Market</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">), this translated into a 70-75% probability of Hillary winning the election.</span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="203" src="https://lh3.googleusercontent.com/QkzSFK9MJmhxqf7Wgw47K5JFarKsp3Rl6F4t3_Sxl7TJjJYLp1fpNIBFX6233x5vZ_lDNNuD3wlk99YmfYlHB-9CHfTusNSKzA3d4MYc3aFbx3rWs0EKrmGW85GlstkwRusmFuDo" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="413" src="https://lh4.googleusercontent.com/pAhGd7wbpe_8mmvQP_Vljn4IYjR0959KS-3ICR1NpkfBX0-G2gEVKC8s8htneD0PCV0VBRpwKvTurNOxm_j86daeEKyx9HQ0NauU8aiCougijy3-A6AOYj65cJyUL68vOKkmfD2m" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></span></div>
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<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Now, let’s turn our attention to the polls in Mexico. AMLO leads the competition by a similar margin to where Hillary was in July 2016--</span><a href="http://oraculus.mx/encuestas/" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">all data and charts here from the people at Oraculus</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">.</span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="440" src="https://lh6.googleusercontent.com/LcuiFn-SbX9JWJ6x9zPLPPe8WgBEEw7eqa2IKD2R4mfV-ESi1IIf0841HMT6Vfo5I4chEhYi5CiXE4C-GXyF35JlEcnaaG_ehHhlBhOuLioQrvD_VecTBgCEMbjHv_4l_4yAC0EF" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" title="Chart" width="624" /></span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Thanks to @horaciocoutino for the excellent data visualization</span></div>
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<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">In their</span><a href="http://oraculus.mx/poll-of-polls/" style="text-decoration: none;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> </span><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">brilliant poll of polls rendition</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">, AMLO leads by 8 points, with the lower bound of the 90% confidence interval of 35% (the numbers in brackets), while the upper bound of Anaya’s confidence interval is 33%.</span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="371" src="https://lh4.googleusercontent.com/Xg96X8JKkC-j0TXuDJdI1714XAbIVcwZ76A9x7Ufg0GSzGBgCWgO07ZZ3FMOZCn1QPWjOeZqZ82tySDJCL9Ljx0lWY45_myPbVq-xvbZGYq3EBmDk7jzmxKw_o4InvGKKqioeOVb" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Where does that leave the implied probability of an AMLO victory? Just looking at this polling data, one might say it is pretty close to 70-75%, just as it was for Hillary in July 2016.</span></span></div>
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<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The race seems more likely to tighten from here, rather than AMLO running away with it. First, support for the PAN candidate in polling data cratered last September with Margarita Zavala broke with the party to run as an independent. But Anaya has started to recover as he is now looking like the #1 “anti-AMLO” candidate. If he continues to run a “clean” campaign and performs well in the debates, one can envision him converging towards the 40% levels of support generic PAN candidates were receiving in mid-2017. That’s not a done deal--Zavala has gained some support lately and</span><a href="https://twitter.com/Mzavalagc" style="text-decoration: none;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> </span><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">continues to troll Anaya on Twitter</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">--but right now it looks like the path of least resistance.</span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="415" src="https://lh3.googleusercontent.com/kLurrxDlt2JXg48Qjfwhv15zClG0PJPfJuzxbZ_E7V_bi9qE9NgVr8h-l86UBEaKH5MfCOmu8gJWobXuM1l7qU_lIULmTOy2UCzd37DXvRPPaputI2w_uplCvmlhszBH7ABGOZzp" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Meanwhile, AMLO has had a very good run. He has consolidated the support of his base and made some inroads to the middle class that was lukewarm at best during his previous campaigns. So far, he has won the battle to re-cast himself as a kinder, gentler, cuddly version of AMLO. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Where does he go from here? I believe AMLO will gain more support as a second choice from “strategic voting” than he has in the past, but he is still a divisive figure. It is tough to believe this chart is going to continue to trend higher towards 50%. Are we at Peak AMLO? Peak implies a summit and decent--I’d lean towards “Plateau AMLO”, even though it doesn’t have near the same ring to it--and it is certainly plausible that he hits some landmines between now and July 1. As the front runner and an outsider, he’ll be the target of an unstoppable barrage of negative ads, media coverage and opposition camaigning.</span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="437" src="https://lh5.googleusercontent.com/8YLSapKsqViEWFdTYhKaMGFwLS82B_xyO4qTKa-BE1zAOsp5EXwjM5E8-H9N-OoUrGFwgXMX3n8NmXRH2ZcTxPrspv8Uir5Pgw2Bblzww9a-MXWjjqHuUj6MZsajDK7QC6pPTzWl" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">There is a good probability that Anaya and AMLO will converge around the 35-40% neighborhood and battle for victory right down to the wire, but Anaya </span><a href="https://www.economist.com/news/americas/21737291-modernising-presidential-candidate-has-best-chance-defeating-left-wing" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">still has a number of challenges</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> to cobble together a cohesive coalition. To make a sporting metaphor, AMLO won game 1 of the seven game series...but there are still six games to go.*</span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Now, what does the market think? First, to judge the potential impact of an AMLO victory, let’s look back to a similar situation in Peru, during their presidential election in 2011. Leftist candidate Olanta Humala was again running for president after narrowly losing the 2006 election to Alan Garcia. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">I think the Humala analogy is a good one. Humala was a known quantity--and after losing the 2006 election, he spent years in the political mainstream softening his image. His politics were certainly of the left but it was unclear just how much of a leftist he would turn out to be--and he had made significant inroads among intellectuals and the middle class. Again, similar to AMLO, some are saying “he really won’t be that bad”, while others continue to see him as the reincarnation of Hugo Chavez--either way, both candidates were considered far more mainstream than in their first runs for office. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">With that, let’s take a look at how Humala’s candidacy, and eventual victory, impacted credit risk in Peru. This is a chart of Peru 5y CDS vs. an equally weighted basket of Colombia, Chile, Mexico, South Africa and China in 2011 during the Peruvian presidential election campaign.</span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="336" src="https://lh4.googleusercontent.com/gNJoXKDn4FZCNEN20lUKIzLdVNRVvSj6NqAFCp1Oxc1Eiba4Kn5GdeA1AfYxWjj13gL8lODHYW7TokY1veUjEsdE8nfaGK1qMg33sVKZQrQ7st_XAczA-o3F-hgsxmOjA9IKFOFd" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">This shows the spread of Peru CDS vs the basket bobbed around zero, even as the campaign got into full swing ahead of the April 10th first round. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">CDS spreads and the market at large only took notice when Humala made a strong run higher in the polls in late March, shortly after the March 18 data point I flagged above. The spread in the basket went from single digits to 44bps on April 4, and held around those levels after Humala decsively won the first round with 31% of the vote, compared to 24% for the second place center-right candidate, Keiko Fujimori. </span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="304" src="https://lh5.googleusercontent.com/8aeLtLZ_6E3nIVfs7Lz4HoZsge7cYZlRp0q3Upc8u8yqrBBiAHqEd8_x6NlMaBixu2OL0pNFVukpPhljRrZSmDQ0zQM_yRzIaI4xqajix4hiYvkU8FqNxY3-RjxitjDBiPbVW57N" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">In the runoff, polls between Humala and Fujimori were a dead heat right up until the election on June 5, which Humala won by about three points. As you can see in the first chart, the market had convinced itself that Fujimori was going to emerge victorious, despite the lack of supportive polling data. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">The takeaway here is that an investment grade credit with a solid history of fiscal stability and orthodox policies can blow out by 40-50bps compared to its peers when a leftist candidate--a solid leftist, not a rank socialist--wins an election. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">While the dynamics of campaigns in Peru 2011 and Mexico 2018 might be similar, AMLO isn’t surprising anyone like Humala did in March 2011. His lead in the polls has been relatively stable, 5-8 points since the other candidates became clear in November. Really nothing much has happened to move the needle since then, and you can see it in the spreads. </span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="285" src="https://lh5.googleusercontent.com/mv9Wc9UFBhvKk6S2m730o4jP_HYf31Q4kXLeI88bFaEqHxGJ3SawA2P_x4xjVtjofMjEB_qKMEj4NPIsZ0YWKujLox71opoundpsZw6JxywMcbZADkcKE_5JWZdL79XD2jx-pxaS" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Mex bears a good resemblance to a basket of BBB industrials, and I have used that as the benchmark and potential upside in the case of a victory by Anaya (or in another dimension, Zavala or Meade). </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"> </span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="299" src="https://lh4.googleusercontent.com/RFoFvg5NKcv1uG8IgoSMw753ihHvdeXa1v1VYT72CPLZrA5ed2GMlSOZP8dfgGh27amEx1XZ0W_Neu4uNXsgqrj3v8CbYY1an2s2BkkAkx1pT6TlENWNbC9dDPb2uZotAk9PtyFo" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">This chart shows the levels at which these two spreads have traded over the past year or so. The Mex/BBB spread is around 25bps now, it traded flat back in September, when Mex was priced for perfection--and as wide at 55bps shortly after Trump’s victory. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">On the downside, there are a few scenarios to how Mex 5y CDS could trade if AMLO wins. My first gut reaction was that it could trade flat to South Africa, which also ties out nicely with the wides vs. BBB industrials after the US election. That would be a huge move, but looking at the chart from Peru 2011, it might not be so outlandish, especially when you consider the positive flow/momentum in South Africa since Ramaphosa took over. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Maybe that’s too much? 10 tight to SOAF would be more conservative--but we also don’t know just what an AMLO victory would look like. Could he win a decisive victory by 8-9 points, and take a significant bloc, or even a plurality of Morena representatives with him into congress? A block big enough to build a coalition with PRD, PANAL, and some rebellious, disenfranchised union types in PRI? Sure, it could happen.</span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Mex/SOAF has been all over the map thanks to the political fireworks in South Africa. But even forgetting that, you can see here that the spread moved 84 bps between October 12, 2017 and January 10, 2018. So a move from -40bps to flat over the course of four months when the two credits are (theoretically) moving opposite directions isn’t out of the question. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="299" src="https://lh4.googleusercontent.com/I5Dd_qDYymisTwLx4ZZKP1Zo7ZrTqgw7gXS5dnCtabzNVAxCz1xrCNVpz3VRslfylNOQC_I1p5LRv5PIdXtJsQgUh2gX4aJZHBcmY7t3gv3F0Tp95nLo3oFTAHjziiuZ9CC6xVlp" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">I plugged some of these levels into a simple probability model based on the following assumptions: </span></span></div>
<ul style="margin-bottom: 0pt; margin-top: 0pt;">
<li dir="ltr" style="background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; list-style-type: disc; text-decoration: none; vertical-align: baseline; white-space: pre;"><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Mex can trade down to near flat to the BBB industrials index (which would also be flat to Peru and roughly 5bps tight to Indo) if Anaya wins, </span></span></div>
</li>
<li dir="ltr" style="background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; list-style-type: disc; text-decoration: none; vertical-align: baseline; white-space: pre;"><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">and that Mex can trade up to SOAF levels in an AMLO victory. </span></span></div>
</li>
</ul>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">While we don’t know exactly what that victory would look like, flat to SOAF is a median approximation between a “weak AMLO” win (no power in congress, concilitory statements towards financial markets, encouraging signals about cabinet appointments and maintaining energy, education and labor reforms), and a “strong AMLO” win, where he carries big numbers into congress and has the political capital to push a more nationalist platform--one that might further complicate or even scuttle NAFTA negotiations.</span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Given those inputs, and taking some assumptions for carry/roll into account, I get a “AMLO wins” market-implied probability of 41%. If you toggle my assumptions a bit you can get something around 38% to 50%. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="67" src="https://lh5.googleusercontent.com/FDab1Cqh7P0Z-O5PD2c_xv9eFhYcCOWnBzucDXUtuZxT9Seu6RFfShA5vpModdLrBKF9ImoljMGIHvesPhtm-CySkyrbil2JEWlJcrFgD1e-7XEiNUTyBlEjES6PsKrBlqEm0Ulo" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="390" /></span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Given the above examples of how a political race can progress, I think the probability that AMLO wins is materially higher than that, probably closer to 60% (my personal opinion is that it is even higher than that, but I’m taking an objective attitude here). If I plugged in a Mex CDS spread to back into 60% probability, it would be about 10bps wider. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">If you assumed 10bps wider is the right figure, but the upside is 10bps tight to SOAF rather than flat, the implied probability is 70%. Still not outlandish, in my opinion. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 700; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Bottom line, as the race picks up speed, even if AMLO doesn’t move much in the polls, there is good reason to believe Mex CDS could leak wider as investors hedge their significant exposures to an AMLO victory. That sets up an attractive risk/reward to buy Mex CDS outright in the case AMLO does indeed win, or if there is a surprise in the stalled NAFTA talks sometime between now and mid-summer. </span></span></div>
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<span style="font-size: large;">Shawn</span><br />
<a href="mailto:TeamMacroMan@gmail.com"><span style="font-size: large;">TeamMacroMan2@gmail.com</span></a><br />
<span style="font-size: large;"><a href="https://twitter.com/EMinflationista" target="_blank">@EMInflationista</a></span><br />
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<span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;">*In the big data/internet age, </span><a href="http://www.whowins.com/tables/up10.html" style="text-decoration-line: none;"><span style="color: #1155cc; font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;">we have sports nerds that calculate this stuff</span></a><span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;">. The theoretical probability if there is a 50% chance of winning each game is about 66%. In reality, the team that wins game one of a seven game series wins 68% of the time in the NHL, 64% of the time in MLB, and 76% of the time in the NBA. All in, the probability of winning a seven game series after winning game one is 71%.</span></div>
EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com16tag:blogger.com,1999:blog-34323687.post-78568913084921199932018-02-16T21:34:00.001+00:002018-04-14T02:14:07.955+01:00The US Economy: So Good It's Bad<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
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<span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">This is why I try not to look at markets more than once a day. Just as I opine in the comments section, ringing the metaphorical “all clear” siren that there’s nothing but air between here from 17.5 to 13 in the VIX….it pops back up to 21. </span></span></div>
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<span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">….and equities roll over, sort of...spoos aren’t playing dead. At least not yet. Prior misgivings about the long-term health of the market notwithstanding, it is tough for me to see how this isn’t anything less than a beach ball held underwater. </span></span></div>
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<span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Gamma driven mineshaft drops notwithstanding, we’ll just go ahead and call this a 50% retracement. Will equity indices drive higher? The burden of proof is on the bear camp again. Looks like a grind higher towards the 2800 level, maybe there valuation anxiety rises again and we get some chop. </span></span></div>
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<span style="font-size: large;"><span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;">I don’t like calling copper the world’s economic barameter, but I do think it strips out some of the noise in other asset classes. Earlier this month it fell roughly 5% from the low 3.20s to mid 3.00s. The beach ball has resurfaced….resume normal service. </span><span style="font-family: "arial"; font-style: italic; vertical-align: baseline; white-space: pre-wrap;">China. </span></span></div>
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<span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">The one market with a decent reversal today is USD:</span></span></div>
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<span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">I think EUR got a little over its skis above 1.25--but not expecting a change in trend here. I continue to prefer EMFX and EM local rates.</span></span></div>
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<span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Now, while there isn't much to throw sand in the gears for risk assets in the short-term, I've been clarifying why I think the glory days for US equity returns are behind us. </span></span></div>
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<span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">I also mentioned in the comments that yesterday I sat in on a speech by Jim Paulsen, the ex-Wells Capital strategist that made a name for himself as the Minneapolis answer to Warren Buffett, regularly appearing on CNBC with folksy witticisms about the market. </span></span></div>
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<span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">I found his outlook pretty insightful--I’ve summarized his views below, along with some graphs I hijacked from his deck, interspersed with my own commentary. </span></span></div>
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<span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">First and foremost was the broadening of the economic recovery. I’d argue this really started back in 2015, when oil prices crashed but employment stayed strong-- and suddenly regular Americans had more money in their pockets. The data hasn’t been updated for 2017 but it is solidly higher with the trend intact.</span></span></div>
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<span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Yet, contrary to all history, and the very fabric of this country--the US consumer hasn’t levered up! There is plenty of runway for increases in areas like retail sales or home prices given the broad household balance sheet strength. Similarly, despite fears about massive issuance by US the corporate sector amid low rates and equity buybacks, Corporate debt relative to profits is far from overstretched levels. </span></span></div>
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<span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Put another way...every dollar of the issuance avalanche (more or less) has been backed by an increase in profits. Is that a risk factor when profits eventually fall in a recession? Sure, but there’s little sign we’re there yet. </span></span></div>
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<span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Earnings are also picking up. This is far from breaking news, but what I find fascinating is the trend. There’s little doubt we’re now at full employment--one can make a strong argument that wages have found a new, higher trend level. </span></span></div>
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<span style="font-size: large;"><span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;">Which leads me to again look at US inflation breakevens. 5y breaks have risen to around 2%.... Yeah, I get it, it’s an oil trade. But it isn’t </span><span style="font-family: "arial"; font-style: italic; vertical-align: baseline; white-space: pre-wrap;">always. </span><span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;">Looking farther back in history--not even ancient history--shows the 5y breaks/oil correlation doesn’t have to move in lockstep. If US producers indeed gun production amid higher prices in the next few months, breaks can move back towards the 1.80s but given the heavy volume in oil forward contracts that has come from US producers selling forward production, I think that’s not a big risk--or at least a two-sided one along with the potential for higher global demand to continue driving commodity prices higher. </span></span></div>
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<span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="251" src="https://lh6.googleusercontent.com/wNQ4GLqT3YaNim62EUom-nMxBiC03a4O2JuCOaNsqszfeH0PTqT43vi1EL0-951-7SxMGmAS9JtmNpT7BT5XCq3TrnztLij7TXrKxv4RftEex9raZerKCeDTizKlaWst38nXCZ-b" style="border: none; transform: rotate(0rad);" width="624" /></span></span></div>
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<span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Given the supply side of the economy at full capacity and the government throwing fiscal fuel on the fire...a lot of fiscal fuel...i think 5y breaks can move towards 2.30%. Remember this would still be well inside of the new trend of 2.5-2.8% for wage increases. </span></span></div>
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<span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Here’s a reminder of what the US government is doing. Spending a ton of borrowed money is the only way to ring in a new era of bipartisanship. </span></span></div>
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<span style="font-size: large;"><span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"><img height="460" src="https://lh5.googleusercontent.com/F20BBIEvKyhVAbZlPOh8ZTSBu-0y8IppbNQq9COt70vg84Chsm-LO3E3ypsx_xxHGcs5ONH5kHyGW1xl9i-pHzVp2UDPdptzlD8OKxdenoBd0lnyaE9PB0G8H5F4DuBEfS7-knVi" style="border: none; transform: rotate(0rad);" width="456" /></span><span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;">.</span></span></div>
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<span style="font-size: large;"><span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;">Indeed, on current evidence rates have to go higher--or at the very least, nominal rates need to continue to cheapen, even if </span><a href="https://www.frbsf.org/our-district/press/presidents-speeches/williams-speeches/2017/october/whats-the-future-of-interest-rates-the-answers-in-the-stars/" style="text-decoration-line: none;"><span style="color: #1155cc; font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;">the fed sticks to the low r* script. </span></a></span></div>
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<span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">What about stocks? What I really liked about Paulsen’s presentation was his efforts to bring some objectivity to equity valuations. </span></span></div>
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<span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">In these two charts he breaks down annualized equity returns based on that month’s unemployment rate and by the ratio of price/earnings-to-U/E (a dubious number, sure, so take it with a grain of salt). Bottom line here is that it will take a lot...and I mean a lot...of game changers to drive and outperformance in equity returns from here. </span></span></div>
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<span style="font-size: large;"><a href="https://www.gmo.com/docs/default-source/research-and-commentary/strategies/gmo-quarterly-letters/emerging-value-and-margin-of-superiority-and-why-are-stock-market-prices-so-high-.pdf?sfvrsn=3" style="text-decoration-line: none;"><span style="color: #1155cc; font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;">The Jeremy Grantham Fan Club</span></a><span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;">, to which I count myself a member (although with the healthy cynicism of James Montier), will recognize the guts of the analysis here. Another way Paulsen looked at it was to look at six month annualized equity returns given certain buckets of the Citi economic surprise index. </span><span style="font-family: "arial"; font-weight: 700; vertical-align: baseline; white-space: pre-wrap;">That index came into the year around 80</span><span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"> and while it has fallen back in recent weeks, the outlook after January’s equity melt-up isn’t good. </span></span></div>
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<span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Unless the economy finds a miraculous way to outperform the high expectations already baked in, equity returns are going to be low, with downside risks. It’s the white goose walking merrily along, ignorant of the fact it is being stalked by a black swan and a gaggle of grey ones.* </span></span></div>
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<span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Maybe one of the grey swans strikes--higher inflation, higher rates, lower equity valuations, or a simple slowdown in the economy-- but no shock. But as I've highlighted before, the market is ever more susceptible to the unexpected black swan. </span></span></div>
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<span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Put another way, the economy is good….it’s bad. If bond yields are heading higher and US equities are fully valued, where should you put your money? Again like Grantham….and me!....the answer is emerging markets. </span></span></div>
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<span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Commodity prices and the value of the dollar are generally good proxies for the performance of emerging markets assets. Industrial commodities like aluminum and copper have been on a tear lately--and while EM equities have done very well since bottoming in 2016, their relative performance--especially beta-weighted--has been just ok. </span></span></div>
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<span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">I’ll save a few more charts on what I believe shows better equity valuations, growth capacity, and real rates in EM...you get the picture. Compra! </span></span></div>
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<span style="font-size: large;">Shawn</span><br />
<a href="mailto:TeamMacroMan@gmail.com"><span style="font-size: large;">TeamMacroMan2@gmail.com</span></a><br />
<a href="https://twitter.com/EMinflationista" target="_blank"><span style="font-size: large;">@EMInflationista</span></a></div>
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<span style="font-family: "arial"; font-size: 9pt; vertical-align: baseline; white-space: pre-wrap;">*If you have the photoshop skills to turn that white goose gold, please get in touch with TMM management immediately.</span><span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;"> </span>EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com62tag:blogger.com,1999:blog-34323687.post-40958307708393798832018-02-15T19:54:00.000+00:002018-02-15T19:54:06.900+00:00Clean It Up in the Comments Section, FolksRe-posting this from the comments section in the previous post. I've taken a libertarian approach to the comments, but we're implementing a zero tolerance policy from here on out. <br />
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Ok listen up Buy Stocks and the rest of you: per IPA's point above, I've spent precious time going through this comment thread and deleting anything that is 1) aggressive towards other users, 2) vulgar, INCLUDING using curse words with asterisks, 3) just generally disrespectful, or anything you wouldn't say in good nature if we were all shooting the breeze about markets over pints in a pub.<br />
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I'm going to give you my Dad speech here--I thought you were old enough to handle the responsibility of an open forum but you've proven me wrong. I'm going to wield the ax accordingly for the foreseeable future.<br />
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If you want to blast people, go to zerohedge. The people that come to this blog are here *because* they don't want to be a part of that.<br />
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For me, I contribute to this blog *because* of the discourse in the comments section with bright people. I wouldn't spend the time writing this stuff if I were just shouting into a canyon. Please show a little respect to me and the others in this forum by keeping it respectful.EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com16tag:blogger.com,1999:blog-34323687.post-40115713782299709762018-02-13T19:27:00.000+00:002018-07-13T04:53:43.210+01:00The Short-Vol Trade: Someone Forgot to Turn Off the Machine<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img alt="So I got that going on for me, which is nice - Implieds are above realizeds so I got that going for me, which is nice" height="292" src="https://memegenerator.net/img/instances/81309842/implieds-are-above-realizeds-so-i-got-that-going-for-me-which-is-nice.jpg" width="400" /></span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><br /></span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Equity markets took a standing-8 count over the weekend and came out swinging on Monday, bouncing roughly 1.5% off the lows from Friday’s close, and a solid 4-5% off the spike bottom lows around lunchtime. </span></span></div>
<b id="docs-internal-guid-b8752b54-9091-aecd-97d0-3d19a318d48f" style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Friday’s headlines were notable given the change in sentiment--a correction! To again quote Matt Levine at Bloomberg….”there you go. All you’re stock prices are correct now.” The rest of the financial media howled in unison. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">It wasn’t a contrarian green light, but it was close. Buyers had a few strong points in support:</span></span></div>
<ul>
<li><span style="font-family: "georgia" , "times new roman" , serif;">On the technical side, there’s little doubt a significant portion of the price action last week was driven by some combination of forced selling, negative convexity, liquidity seizures, and outright panic. </span></li>
<li><span style="font-family: "georgia" , "times new roman" , serif;">Fundamentally, no change, and notably cheaper valuations:</span></li>
<li><span style="font-family: "georgia" , "times new roman" , serif;">still strong global growth, </span></li>
<li><span style="font-family: "georgia" , "times new roman" , serif;">A weak USD</span></li>
<li><span style="font-family: "georgia" , "times new roman" , serif;">Strong commodity prices</span></li>
<li><span style="font-family: "georgia" , "times new roman" , serif;">Fiscal stimulus in the US</span></li>
<li><span style="font-family: "georgia" , "times new roman" , serif;">A new Fed chair that has pledged fealty to the credit-addict that gave him the job</span></li>
<li><span style="font-family: "georgia" , "times new roman" , serif;">Moreover, central banks that recognize the fragility of the beast they birthed</span></li>
</ul>
<span style="font-family: "arial"; font-size: large; white-space: pre-wrap;">It adds up to a decent opportunity to buy...if you didn’t get run over making the same call at some point last week. I’ll let y’all duke it out in the comment section on that one. It is the last point that has been bothering me all week. </span><br />
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">An astoundingly quiescent market, followed by higher rates and a modest risk-off move in stocks, contributed to a MOAB move in vol, gamma and the VIX. Usually when something like this happens--and it is supposed to happen periodically--vol everywhere spikes higher, FTQ assets appreciate, and the system rebalances itself. </span></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">What is </span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: italic; font-variant: normal; font-weight: 700; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">not</span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> supposed to happen is something like this: </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="467" src="https://lh4.googleusercontent.com/20w_dX-57RmxPpGzZBIyDUMo7CweWvDGTpJRpGCLuAlWcoifn_0jEHxtqS0lFcytpzggpk2Owj-H_CTAUTh9kqXGSS0nbxUnrT2vAsI_MD_y36KulHWlgiZX4noDz9Y7jo8NAxD0" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">So what’s going on? There’s been no shortage of media coverage on the blowup of short vol ETNs like XIV. But as I highlighted last week, these products are--or were anyway--$2-4bn in notional value in a market that is many, many times that size. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The real iceberg beneath the surface is the short-vol trade </span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">writ large</span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">. The short-vol trade goes by a few different names--last October, in </span><a href="http://www.artemiscm.com/s/Artemis_Volatility-and-the-Alchemy-of-Risk_2017-bp5g.pdf" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">an article highlighting the depths of the short-vol monster</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">, Chris Cole at Artemis Capital Management illustrated it as a pyramid: </span></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="401" src="https://lh3.googleusercontent.com/myV4V-aD6eVsn5GkXsVVcWxT015DUUQARN5qwZu0DxE4QKDEtTemf6bO7zvomyX7pWYpS2XVziDHzMgyK0wABoy-RIRUJLL8Ney9X6SUu7cR7HW5wg21DU3iTiTEWTryhb_2Yu0E" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="436" /></span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Cole called this the </span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Ouroboros</span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">, the mythical greek snake that devours itself by eating its own tail. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">“Volatility as an asset class, both explicitly and implicitly, has been commoditized via financial engineering as an alternative form of yield….A long dated short option position receives an upfront yield for exposure to being short volatility, gamma, interest rates, and correlations. Many popular institutional investment strategies bear many, if not all, of these risks even if they are not explicitly shorting options….Lower volatility begets lower volatility, rewarding strategies that systematically bet on market stability so they can make even bigger bets on that stability. Investors assume increasingly higher levels of risk betting on the status quo for yields that look attractive only in comparison to bad alternatives.”</span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Put another way, as the avalanche of monetary stimulus compressed risk and pushed down expected returns, Wall Street needed a new asset class to sell in the search for yield. Pension funds needed to maintain high returns, and were ready to listen to the sales pitch for </span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: italic; font-variant: normal; font-weight: 700; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">volatility as an asset class. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Let's look back a couple of years for some examples of how this was sold to investors. Pimco led the charge in 2012 with </span><a href="https://www.pimco.com/en-us/insights/viewpoints/quantitative-research-and-analytics/the-volatility-risk-premium" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">this article entitled, “The Volatility Risk Premium.” </span></a></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">“We conclude that the risk-return tradeoff for volatility strategies compares favorably to those of traditional investments such and equities and bonds and that the strategies exhibit relatively low correlations to equity risk.” </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Ooh, now you have my attention</span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">, says Joe Capital-Allocator at XYZ Pension Fund, </span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">tell me more</span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">. All too happy to oblige, Pimco continues: </span></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="400" src="https://lh4.googleusercontent.com/lmd0M26lu39CLvfRCAv240N6BgUECthOh3iw9f7ZbaH08HMgRRVlycc6AAHkrG_KDUC-fCwAbU3cXBph8ZD5re0lsgWhVkxYXJxjNAH2DcolhbLJXDtuJlrqLjfeT3rT6s3CRIXM" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="532" /></span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Well there it is...implied vol is typically higher than realized vol. Real MIT rocket science PhD type of stuff. There is a good rationale and justification for that “premium” that is not unlike an insurance premium. Though I wouldn’t call it that, since realized and implied volatility really don’t have a relationship other than one that is backward looking. </span></span><br />
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><br /></span></span>
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Yes, there is a “price” there. What’s the right price? Think back to 2012--in the article The Pimco authors concluded, “given the economic rationale for the existence of a volatility risk premium, and the supportive supply-demand situation that emerged following the 2008 financial crisis, we believe an allocation to volatility strategies could enhance portfolio efficiency.” </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">I’ll bet they did….but they were right! Back in 2012, there were no shortage of Black Swan disciples of Roubini and Taleb pitching and building tail risk products and funds. The memories of the GFC were still fresh, and the wounds were still healing. If that weren’t enough, the entire European project nearly imploded on itself, giving more ammunition to those that believed the financial system was on a steep descent into (further) chaos. It comes back to </span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">recency bias</span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">...The </span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">demand </span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">for volatility was high. The short-vol trade was born to provide the supply...and fees!....to support it....and yield-hungry institutional investors ate it up. It was a good trade if you had a long-term time horizon and didn’t think the world was about to end.</span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The trouble is, someone forgot to turn off the machine. By 2015, </span><a href="https://www.nomura.com/events/9th-annual-global-quantitative-investment-strategies-conference/resources/upload/3_30_Nick_Firoozye.pdf" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Nomura was pitching a product they called the eVRP</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">--the Equity Volatility Risk Premium-- all backed by a Nomura index that followed this kind of thing. As prices rose, financial engineering took over for thematic simplicity. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Now, this wasn’t just a diversifier, it was some sexy stuff! Check out these charts: </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">The volatility risk premium has been a great trade compared to “long only”</span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="334" src="https://lh6.googleusercontent.com/fgHk_dUNI5IfYH54-kwipKyyix8cRS1Fe3O_fGSgfJ0o7oBjM5UofzlzXcy9tv73LqTg1_F81zAKUuw16Df8xffO-riygg64T46KmbtwFzWPeMc4jLlh0vGz5KI6NjbqunFd3eS-" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="315" /></span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b><span style="font-family: "arial"; font-size: large; font-style: italic; white-space: pre-wrap;">Selling equity vol risk premium is when vol is low...your road to a 2.0 Sharpe</span><br />
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="207" src="https://lh6.googleusercontent.com/izXIJ5UmQIs0HCdDPi1Ns4aGPKq_PsbLxs-MfyItoMvaywc70tPUod2o2eUo3uttQlqwuWljzWDt2z15uLTRg1Es581jvWv_iqHIX83KGNYk1Q5gz1GWg5LveYsrbXxcJ3QbTqLD" style="border: none; transform: rotate(0rad);" width="400" /></span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">The equity vol risk premium is better than ya know, other stuff</span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="212" src="https://lh6.googleusercontent.com/HGdIZZeSviAgIc9C-3F1MZlNcUM-88xsN0lhKLoP51UbObXedSR0bPy0Gt7kN1MWmH-NgezSjdbs4QZnaVWKHN0pCNisPTzfvwML1wLMxACY9OETuOeoD4Dy9K92cnHBSic-wiuo" style="border: none; transform: rotate(0rad);" width="400" /></span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">All the cool kids are doing it</span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="182" src="https://lh5.googleusercontent.com/2lostvakuAOvSHAzVPgq9f7_1MNlLuI_GDkg9zGUmpXaXP_bn0GPY7OtexfwG61BbNpAOPSchVJcx6lUfFenQsQES8oBeR2Mf8NUbN9h2KolkPgrnW15cfD9BGfzF4K9g4vaeS6C" style="border: none; transform: rotate(0rad);" width="400" /></span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b><span style="font-family: "arial"; font-size: large; vertical-align: baseline; white-space: pre-wrap;">Three years on from the Pimco article, when there was a tasty volatility premium thanks to the back-to-back existential crises in global markets, Nomura is pushing the same trade, only in the form of their esoteric </span><span style="font-family: "arial"; font-size: large; font-style: italic; vertical-align: baseline; white-space: pre-wrap;">eVRP </span><span style="font-family: "arial"; font-size: large; vertical-align: baseline; white-space: pre-wrap;">product rather than the more straightforward Pimco strategies of 2012. And of course, Nomura has the data to back it up, and your friendly salesman has just the right product for your long-term risk bucket. </span><br />
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<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">This is the </span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Ouroboros. </span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Just like the housing/credit bubble in the mid-00s, the financial system doesn’t know how to stop. </span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: italic; font-variant: normal; font-weight: 700; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Just because there was a rich volatility premium in 2012, doesn’t mean it is perpetually and always going to exist.</span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> In fact...quite the opposite. As markets calmed, the trade worked….and more money flowed into it. Supply and demand swung the opposite direction, but nobody ever turned off the machine. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">The snake latched on to its own tail, compressing vols, perpetuating BTD, which compressed vols, which juiced returns. Lather, rinse, repeat. And wait for the bonus checks to roll in. </span></span></div>
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<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br class="kix-line-break" /></span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">How can you identify when this trade is overdone? You can probably point to your own examples, but these two charts sum it up: </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">You’re telling me there’s an equity volatility premium….even as equity vol its generational lows?</span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="455" src="https://lh5.googleusercontent.com/db1NcfozSeuh1hnc0Uox_0miz2wiMAz92pbFQSIvAS-0QbUeRSKtthZeoagxat3TM_hKnve7Wk9mAxx4gc3hAPZ1Plewj3HJwtneahgM-Q8LY6rDOBvnfver4R8M3pJqUF9LFj_N" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="462" /></span></span></div>
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<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">That can only be because you’re looking at </span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">realized</span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> vol still below </span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">implied </span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">vol. That’s what you call a “premium”? </span></span></div>
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<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Then in fixed income….monetary authorities are finally hiking rates and decreasing or stopping asset purchases….and you think you can capture a “premium” for volatility above realized when implieds (as proxied here by 1m/10y USD swap vols) are </span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">THIS</span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> far below the long-term average? </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="280" src="https://lh4.googleusercontent.com/qo0n9XOiaNokfc178CUwyPMsnYUgQE3piTLmqhEmHo3uBmkMHCyIOSvRGAs2n7OjsVIB35ZVgyt5dfmxXBq05yrsR0EZjEVAI5s7WpZMSYNzPF-fbZndNcy8PKmj_WApZvUsvREs" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><i>(I trimmed this chart back to the lows in January before the spike in the last two weeks to illustrate the point, but the current level stands just above 80)</i></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">As Cole said in the “Alchemy of Risk” article...as the short-vol sales machine perpetuated itself, it gave birth to a reflexive process: </span></span></div>
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<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">“What we think we know about volatility is all wrong….Modern Portfolio theory conceives volatility as an external measurement of intrinsic risk of an asset….this highly flawed concept, widely taught in MBA and financial engineering programs, preceives volatility as an exogenous measurement of risk, ignoring its role as both a source of excess returns and as a direct influencer on risk itself. To this extent, portfolio theory evaluates volatility the same way a sports commentator see hits, strikeouts, or shots on goal. </span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: italic; font-variant: normal; font-weight: 700; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">The problem is volatility isn’t just keeping score, but is massively affecting the outcome of the game itself in real time. Volatility is now a player on the field.</span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> “</span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">That’s what has changed...Pimco and Nomura built their analysis on a history where volatility was a measure. Now it is a player. It has a price. What once was rich is now obscenely expensive. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Yet for these guys it all comes back to returns--more specifically risk-adjusted returns. How did the Nomura guys fair at selling volatility? </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">This is the stated performance of their “eVRP” product as of January 25: </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="81" src="https://lh4.googleusercontent.com/U7h5cL_mSiF_LXF9AKBPsYwngTi6OKQpVdUsLs1y5uKB7CGrLfXKs9uCFo2pYvXrKWBWM58r5fqN1IeKRVFd6WL3id7EZXJwPfRmzd9IZME2PuM4CnPKDgPbtELgz3VTgx90V1AM" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="448" /></span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="111" src="https://lh3.googleusercontent.com/Iaa5Zr-gfYiaJaW9NC4jB3vHMeS_dChXaiuLrvfbQNPFOP_WsjfaPQ_HO7YSHkCF0DmT3mn4YB_LCvJO2Dif20f2Ks23VlQUszF9cni-XFTxFccYo8td_2lKkciOBFYgK-RMAu6b" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="523" /></span></span></div>
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<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">12-month excess return of 4716 basis points! A 1yr sharpe ratio of 3.74! As Kevin Muir at MacroTourist said back in November in a post on the same subject, </span><a href="https://www.themacrotourist.com/posts/2017/11/23/the-next-crisis/" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">“Hedge fund managers do terrible unspeakable things for Sharpe Ratios of 2.5 to 3.</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> Indeed...and pension fund investors are no different. Moreover, that 5-yr Sharpe of 1.28 is pretty spicy too when compared to the Sharpe on long-only equity returns skulking on either side of .5. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Now, fast forward to last Thursday:</span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="66" src="https://lh3.googleusercontent.com/5MScgkrdAAGsgrGCEjfer1dtpQBgtbYWdJmPsWeH6kAzlxmscMi8qT_AM0VTnqJIHmEvNrugwevqUpWfHQXQkADte8rIEVOj74vqimywFsyuPQwQ22eHnQkmaBNhZa1-SuEtLlsj" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="486" /></span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="124" src="https://lh3.googleusercontent.com/ewzGqP4IriViiebK5ajgJ_t7GplZrignH5ozdW6RtTMzAI_wb0W9G95DTKb9C8Hq2qP9cjTY8OkLYVlsWI_sDapnAP5mo3YikRMXI3zwbD887MH_TjAbzxad4HbYwlBJLppwKEti" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="530" /></span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Oh dear. Our precious short-vol baby vaporized that 1yr excess return in only two weeks! And those Sharpe ratios went from heavenly to downright ordinary, and I’ll hazard a guess that these figures aren’t including the tasty fees that your pension fund paid their friendly neighborhood bank or hedge fund for managing this risk over the past few years. </span></span></div>
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<span style="font-family: "arial"; font-size: large;"><span style="white-space: pre-wrap;">It started as a good trade...but as the money rolled in, they just couldn't turn the machine off. </span></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">And so it begins, where the top of Cole’s short-vol pyramid has gotten wiped out--the $60-$100bn in explicitly short-vol funds that were betting on pension fund overwriting, “risk premiums”, or just whacking bids in the VIX. While these funds may not have blown up in style like XIV, they have been mortally wounded by the combination of a landmine in their performance record and the demonstrable gap in liquidity for their strategies. The universal risk management strategies like </span><a href="https://polemics-pains.blogspot.co.uk/2018/02/the-changing-narratives-of-market-dump.html" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">VaR de-risking like those discussed by Polemic</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> in </span><a href="https://polemics-pains.blogspot.co.uk/2018/02/what-happens-next-new-risk-paradigm.html" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">his weekend posts </span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">will play a big role too. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Nevertheless, for short-vol the sales pitch is dead--these strategies won’t go away overnight but they will die a slow death. In the short-term, vol will subside--but the next chapter hasn’t been written yet. What does the future hold for the more subtle short vol strategies--like “volatility control” and risk parity? </span></span></div>
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<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="418" src="https://lh5.googleusercontent.com/GyzIClVtCrxtefeR6w3Jf3_Dr4LucXrrGUk1f9DudmI5fX14zr9TizAsmBdSLiRMhPg0YzfPNV5W7GnX1ZS9OvGAIWFI2hCmR_5ljKpE7NtwuKIvVtL80-Tg1CFAaAVJskNixVLk" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="410" /></span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">That might depend on faith in the system, the continued negative correlation of equities and fixed income products, and the ability of leveraged corporations to continue servicing their debt in the event of a shock to the system or a material slowdown in global growth. And don’t forget this….liquidity is now such that this short-gamma trainwreck may not be so easily contained within equity markets when we inevitably encounter a genuine exogenous shock to the system.</span></span><br />
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><br /></span></span>
<span style="font-size: large;">Shawn</span><br />
<a href="mailto:TeamMacroMan@gmail.com"><span style="font-size: large;">TeamMacroMan2@gmail.com</span></a><br />
<a href="https://twitter.com/EMinflationista" target="_blank"><span style="font-size: large;">@EMInflationista</span></a></div>
EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com47tag:blogger.com,1999:blog-34323687.post-11835238435318743372018-02-09T13:00:00.000+00:002018-04-14T02:13:18.654+01:00Musings On Mexico's Presidential Election--A Market Waiting for Tomorrow<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">This July, these five characters will be vying to be the next president of Mexico. The one on the far left--in the picture and the political spectrum--is Andres Manuel Lopez Obrador, or AMLO. He leads most polls, but the campaign is still in the early stages. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="313" src="https://lh5.googleusercontent.com/kHA_fassZvA4nXB9om_uBaAZkoKbVH7KddlTw4jbquj6Hn2DCXKUQeyHH1HVH0YhqmntKBz6_6GPTbnLh_HpVHta77GTmPqGl6Ihcsqcuxft5bPwdYeTQreaYQ7R__Alig8Rf4w4" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="465" /></span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: x-small;">From left to right: AMLO (Morena), El Gato en Saco (PRI), Flaca (Ind), El Joven (PAN), and mi guarura (Ind)</span><span style="font-size: large;"> </span></span></div>
<span style="color: black; font-family: "arial"; font-size: large; vertical-align: baseline; white-space: pre-wrap;">Thanks to his two runner-up showings in 2006 and 2012, the market has convinced itself AMLO’s populist campaign won’t sustain itself and one of the other candidates will emerge victorious by uniting mainstream voters. </span><span style="color: black; font-family: "arial"; font-size: large; font-weight: 700; vertical-align: baseline; white-space: pre-wrap;">I believe political undercurrents and the polling data indicates otherwise, and current market optimism presents an attractive opportunity to sell MXN or buy MXN vol.</span><span style="color: black; font-family: "arial"; font-size: large; vertical-align: baseline; white-space: pre-wrap;"> </span><br />
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"> </span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">First, a quick primer on Mexican politics. The current president is Enrique Peña Nieto, or EPN. He is a member of PRI, a party that has run the government for most of the past eighty years. </span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 700; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">His presidency has been a disaster</span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">. Growth and wages have stagnated, inflation has spiked higher, and the peso has been decimated. People are frustrated with high rates of crime, and dramatically higher energy prices, despite the promises cheaper gasoline and propane following the passage of reforms in 2014. </span></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Corruption has been a big issue too, as allegations have dogged the administration since its early days, as well as PRI governors throughout the country. This has left behind the stench of systematic sleeze, both within PRI and throughout all of the nation’s political parties. Do you really believe Mexico was the only big Latin country to be spared the </span><a href="http://www.bbc.com/news/world-latin-america-41109132" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">public works bribe-fest led by Odebrecht</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">? Maybe…..</span><a href="https://www.buzzfeed.com/mauriziomontesdeoca/epn-odebrecht-1?utm_term=.cnyNBeQ2l#.qo2mgPj2w" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">But it seems like a bit of a long shot. </span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> People aren’t buying it. </span></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">EPN and PRI have led his administration to unheard of levels of unpopularity in Mexico; only 26% of people approve of EPN’s government. Here is a chart of the approval ratings for this stage in time of last five administrations...none of them come even close to the vitriol generated by the current government. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="276" src="https://lh4.googleusercontent.com/JMm0C_uSeeeByKsWxCTRXL6G6_ud8dSIWpta-KStQmYoZnT2eyyD_ZYrHozwogrDSkrt3QFvvLUJndDcVBuDXIxdTKxwwE9Ik3W0Yf5H4E4ictNo0R9TxjMHcDIOeYIoXecEPOzG" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="391" /></span></span></div>
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<span style="font-size: x-small;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Source: </span><a href="http://www.consulta.mx/index.php/estudios-e-investigaciones/elecciones-mexico" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Mitofsky Group poll, December 2017</span></a></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">And lest you think this is a “class warfare” thing, look at this chart. </span></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: italic; font-variant: normal; font-weight: 700; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">EPN approval rating by group:</span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="372" src="https://lh6.googleusercontent.com/TdqgzXaC1YMkm_7G8jh7mrkJ77zfKuGZDzUJkl_JUmImP4ovv1bxQj7B_FYZW-tQ4m0tkPOeaFT1AvhAayeylkpYpGwKGYJ1JVvMZCiSAsKRlGU-n3Qbmh-SMLg0_TsdmYij_GHh" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="367" /></span></span></div>
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<span style="font-size: x-small;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Source: </span><a href="http://www.consulta.mx/index.php/estudios-e-investigaciones/elecciones-mexico" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Mitofsky Group poll, December 2017</span></a></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">This chart says….men, women, rich, poor, uneducated, educated, young, old….they are all united by one thing: a hate EPN.</span></span></div>
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<span style="font-family: "arial"; font-size: large; white-space: pre-wrap;">Well, a hate for two things. EPN and Trump.</span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">People are fed up. All of ‘em. This isn’t 2006. </span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 700; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">It is going to be a “throw the bums out” type of election. </span></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">No doubt about it, AMLO is a divisive name. He is your standard-issue leftist, and talks about import substitution, national pride, how to revive rural economies, and promises to roll back market-friendly energy reforms, amid a broad “power to the people” theme. Financial markets panicked in 2006 when it looked like he might win, and there has been no signs that his rhetoric has softened in the intervening twelve years. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">AMLO will run against PRI’s Jose Antonio Meade, and Ricardo Anaya, the leader of the center-right PAN, as well as a couple of independent candidates who have yet to show any signs of life. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Meade is perhaps one of the weirdest candidates I have seen from an establishment party in any country. He’s not even a member of the party. He’s a life long bureaucrat, with high marks for basic competency, but has never run for office at any level. In contrast to any other PRI politician, he’s clean as a whistle--but has the all the election campaign charisma of an old </span></span><span style="font-family: "arial"; font-size: large; white-space: pre-wrap;">house cat. </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">AMLO leads early polls by between 3 and 12 points. But financial markets are desperate to believe Meade will somehow </span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">find a way</span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">. A brilliant illustration of this fact came last week, when </span><a href="https://twitter.com/EMPosts/status/958445428722274305" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">I stumbled across this gem in a tweet by Bloomberg journalist Eric Martin</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">: </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="729" src="https://lh3.googleusercontent.com/aF0ZhHZlGpQxnQRvCu8hpx1D7nENz4b8sIvD9m7ivxupXG84ANcmQ44J4w0SaR-q7ukD-CnwEj8uPnfspw7Tl6uSaYQ9AuaLBgCEj7YgH4DOUlkJ_ndKsxY4moM31hRBLKaslybN" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="409" /></span></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Now, let’s take a look at a recent poll for a national newspaper by polling firm </span><a href="https://t.co/0ik4st1uOb" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Buendia & Laredo</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">: </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: italic; font-variant: normal; font-weight: 700; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Regardless of the candidate you are planning to vote for, with what you know or have heard, who is the candidate most likely to win the election of President of the Republic?</span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="374" src="https://lh3.googleusercontent.com/VyQW-GXAPcbrCEMdqDuc0jah1mKA_g5kgLfKIaHrKoUH2QirpmT2bjD7ILo8XHIL-osxCN6kr-7Z-_zgIZHWumg-a-Izfmh8RT_dAyRXW66oQSNkl_fx0f0JUHQpsZR2Lx9qLOFW" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="300" /></span></span></div>
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<span style="font-size: x-small;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Source: </span><a href="http://www.buendiaylaredo.com/encuestaspublicas_detalle.php?idpublicacion=438" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Buendia & Laredo poll for El Universal, January 29, 2018</span></a></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Put another way, actual voters believe AMLO will win by a near 2-to-1 margin. </span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: italic; font-variant: normal; font-weight: 700; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">There’s a 46% gap between the proportion of actual voters that believe Meade will win, and the business elites in the Santander poll. </span></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Before we look at how that may manifest itself in a trade, let’s look deeper into the polling numbers. </span></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Presidential preference</span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">--AMLO leads PAN’s Anaya by 6 points, but a whopping 16 points over Meade. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="317" src="https://lh6.googleusercontent.com/kNqGI6wKuRNHc7anUD1uG37F76-uSBqC7SxRkf14ME9uumzBwLRJtnH5nzb_C5wGz9uI9cpI9ajR7-i4gkqUpBuBugROeLk26_hGp5lVISJP2pMXVhXyvEK-IzwX4cJg2Ch_yE4J" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="493" /></span></span></div>
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<span style="font-size: x-small;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Source: </span><a href="http://www.buendiaylaredo.com/encuestaspublicas_detalle.php?idpublicacion=438" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Buendia & Laredo poll for El Universal, January 29, 2018</span></a></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Alright you say, but as the election approaches, will center and right-wing voters unite under an “Anyone but AMLO” flag? That appears unlikely. First, both Meade and Anaya will have their own problems uniting their constituencies. More importantly, AMLO is way more popular among supporters of the other two main candidates than they are among his supporters. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">In a hypothetical two-way race between AMLO and Anaya, AMLO’s support rises from 32% to 46%, while Anaya’s rises from 26% to 38%. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"> </span></span></div>
<img height="377" src="https://lh6.googleusercontent.com/c0SolJ1WhIhQ9_5EhfkxhcuizDccaI-Vp0gKR14evNF59cJLjRRRTAhjZAI1KEKsIJfH8DOmzba7XoKQZJwDL18Vk8ULTcnDSO71uHbyi3lZ7P8FEIaBB0Kf9PSH4VJ5YJxalpM2" style="border: none; font-family: arial; font-size: x-large; transform: rotate(0rad); white-space: pre-wrap;" width="348" /><br />
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<span style="font-size: x-small;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Source: </span><a href="http://www.buendiaylaredo.com/encuestaspublicas_detalle.php?idpublicacion=438" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Buendia & Laredo poll for El Universal, January 29, 2018</span></a></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">The outlook in a two-way race against PRI’s Meade is even more in AMLO’s favor. AMLO’s support goes from 32% to an outright majority--55%. While Meade’s support rises from 16% to a pathetic 26%. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="294" src="https://lh5.googleusercontent.com/pekRUp1XvGcXm3iM9M6ayaGti0iHqirEsmnOHlN0Qa9Gg37TU1BHn0bAr1Nn3dodTwfJHute5RCsqrtUVcwsfVv6UqzbbiSLIIZUck1MeSdpTc02fZaq7hZYpGiQbDscE28XmNuq" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="423" /></span></span></div>
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<span style="font-size: x-small;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Source: </span><a href="http://www.buendiaylaredo.com/encuestaspublicas_detalle.php?idpublicacion=438" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Buendia & Laredo poll for El Universal, January 29, 2018</span></a></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Another prevailing belief about AMLO is that he has a “toxic brand” among centrist voters, owing to his long history of leftist politics and his decision to dispute the results of the 2006 election. But again this ignores the data--AMLO is </span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 700; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">BY FAR</span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> the most popular politician in the race! </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: italic; font-variant: normal; font-weight: 700; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">What is your opinion of...</span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="350" src="https://lh6.googleusercontent.com/WuIiDlid3V4pQ6noqsr4LOiPeYxpeIv3460Ob0lguBi2vDHvek5Zk6Rv5YPdE5ZIhDZ1NfUCDC8RnYgpSZFcW-OaVTb1rB19G521d99d5o4gFsoZkmK8a5CmuUrmSo4fw05PN441" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="364" /></span></span></div>
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<span style="font-size: x-small;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Source: </span><a href="http://www.elfinanciero.com.mx/elecciones-2018/amlo-con-mas-de-10-puntos-de-ventaja-sobre-anaya-y-meade" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">El Financiero poll, February 6, 2018</span></a></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Maybe there is some chance that Meade can unite the party and take advantage of the PRI “machine” to bring in the middle class and get out the vote in the rural south and northeast. But it is tough to see how, given his personal unpopularity and these numbers: </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="216" src="https://lh5.googleusercontent.com/7VcbpBok_8oT4sdDd2v9BnYewj69GSq1E_9ctXANVf88DLFXvSYbVV_0W5Np_BEa2XyKhIR4uW9CJQyRfip-Rr-t2F8vDz3Qd2poNlcI6-MKAx98ULT7pprl_k6vvb4ONHT937gS" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></span></div>
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<span style="font-size: x-small;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Source: </span><a href="http://consulta.mx/index.php/estudios-e-investigaciones/elecciones-mexico/item/1002-preferencias2018-ene18" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Mitofsky Group poll, January 17, 2018</span></a></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 700; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">59% of people say they would never vote for PRI--a number that has risen materially since Meade’s nomination in November</span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">. With these numbers, Meade might struggle to beat The Donald in a head-to-head race.</span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Can Anaya and the </span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Frente por Mexico </span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">left/right alliance cobble together a coalition to defeat AMLO? Sure, it could happen, especially as the campaign picks up speed and gets into debates where he could excel. As of now, the metrics aren’t suggesting Anaya is gaining any traction, and the machiavellian break between him the Calderonistas led by former PAN first lady Margarita Zavala will continue haunt him so long as she continues her independent bid. By refusing to make peace with Zavala, Anaya signaled to many voters he is just another career politician, exactly the type of figure that many Mexicans claim they are sick and tired of. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Given there is no runoff, Anaya could cobble together 30-35% of the vote between independents, PAN, PRD and dissident PRI voters and hope Morena’s lack of financial resources, campaign experience and “GOTV” machinery dilute AMLO’s electoral performance despite his broad appeal. Even if that happens, it won’t be pretty, and there will be plenty of volatility along the way. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"> </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Putting it all together: </span></span></div>
<ul>
<li><span style="font-size: large;">The Anti-PRI/anti-corruption vote is going to be significant</span></li>
<li><span style="font-size: large;">AMLO is popular, and a likely second choice candidate by many non-supporters</span></li>
<li><span style="font-size: large;">Meade will have enough trouble uniting PRI, say nothing of the country, behind his campaign,</span></li>
<li><span style="font-size: large;">Anaya, same thing, but with marginally better chances</span></li>
<li><span style="font-size: large;">There is little chance of any change in sentiment towards PRI, or a material change in economic fortunes to favor establishment candidates at this stage of the race</span></li>
<li><span style="font-size: large;">The base case should look for an AMLO victory in July. </span></li>
</ul>
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<span style="font-family: "arial";"><span style="white-space: pre;"><b><br /></b></span></span></div>
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<span style="font-family: "arial";"><span style="white-space: pre;"><b><br /></b></span></span></div>
<span style="font-size: large;">So what’s the trade?</span><br />
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</ul>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">First, politics matter. Another undercurrent in this fantastical EMFX market may be the belief that this is a “kinder, gentler” AMLO and EM investors aren’t that worried about him blowing up the market-friendly system. But just looking at recent history in Argentina, Brazil, South Africa, or even Chile, where equity and FX markets rallied hard after Piñera’s victory in December, and you can’t ignore the power of politics in EM. The result of this election </span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: italic; font-variant: normal; font-weight: 700; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">will</span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> move the market. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">The easy answer is just to buy USD/MXN and be done with it. You won’t get much argument from me on that one, especially after MXN was swept along with the USD fire sale over the past three months. Nobody is making big country-level decisions (ARS and ZAR being notable exceptions). All macro, all the time. Flows. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="292" src="https://lh5.googleusercontent.com/7EPT2d5PbW82Gvk9nrPIpletoHwJ-vXWC1KbDp8uSgpo9yudsPD4zlveKCplW84DgCO8Sz7SySUnK1If0WnVUmvKgvRU1TvCHuKlG_jrZ0HcSM6y9vBMg2N-81rxx6gqr-a9RcyS" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="563" /></span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: x-small;">Source: JP Morgan</span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Now, over the past week as US equity markets cracked, volaitlity spiked, and short-gamma funds started washing up dead on the beach, high-beta EMFX has been quiet….a little </span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">too</span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> quiet. You could do a lot worse than to overlay a short MXN position in a risky portfolio. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"> </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">If you’re too squeamish--or too bullish on EM, I guess-- to buy USD/MXN outright, the currencies in the chart above would be high-carry candidates from the long side. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">FX volatility presents an opportunity as well. This is the chart for 3m atm volatility in USD/MXN and USD/BRL--which I included as a “control”--going back to the stone ages in 2010. Today’s level around 12% isn’t too bad at all historically--and certainly seems cheap flat to BRL. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="264" src="https://lh6.googleusercontent.com/oZ0QuZVh3Y-e1p_by8LtlVUfmaCnwRlW56ojFQAdwSTjzdYCXvy6z97UPwcTt1KyeaXRyOQHb_1iBYyKjCHNRGWORUCWobZm01FnsizO42pwBB9CVgEZqQKDX9Ft9msYGbRDBw1L" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="572" /></span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: x-small;">Source: JP Morgan</span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Similarly, 3m riskies are flat to BRL and not looking expensive at all. Keep in mind both of these trades give you protection against a global short-gamma freakout or Trump drone-striking NAFTA too. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="245" src="https://lh6.googleusercontent.com/SJvsg-BlAPkZG3wEvxf3Z2SxxKpjXlPMsrTcaFWW9Z9DIxIhv9mV0wIf8QKDmeu06v1RXq1z4LLa51ZhwP3092iCtw5JIkehOfyUnL4hdPS5I2jlUl-7Yu_mwD2gxxCGMQYK2ob-" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="536" /></span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: x-small;">Source: JP Morgan</span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Indeed, the 3mo option expiries only give you protection until early May. If you prefer a full six months of protection to get past the election on July 1, those levels look pretty spicy. The 3mo, 3mo fwd atm vol is 17%, which you see in the chart above is higher than most any non-crisis data point. Similarly, the 3mo, 3mo fwd 25d RR is 5.3%, which is higher than anything this decade outside the European debt crisis. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Those levels may pay off, but look overdone relative to spot 3mo volatility. Moreover, while the 3mo vols only take you into early May, the fireworks will likely already be in the air by that time, especially if AMLO has consolidated a significant lead and his rivals appear incapable of staging a comeback. This chart from a Barclays piece last week shows how MXN started to depreciate around this time in the 2006 cycle, when AMLO-risk was particularly acute: </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="280" src="https://lh6.googleusercontent.com/cr364k8J6Z-AfT55ZDloXVaPv3nXPeJu2X43yJy1gJJWJPTQ9cGXHAqmpA0mGaXIEHNPKmjX0lf5Ij1kKp4Fs2Gx2NOaIqjDGFZqaH3ZPaJF2O82xYIoJPQoVGhAN480gh3jJyOE" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="491" /></span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: x-small;">Source: Bloomberg, Barclays</span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">And while that underperformance in MXN in 2006 was triggered by AMLO jumping to the lead in the polls, the peso continued to weaken throughout the campaign, even though it was a tight race right to the end. </span></span></div>
<span style="font-family: "arial"; font-size: large; white-space: pre-wrap;"> </span><br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="336" src="https://lh4.googleusercontent.com/a-BllkfWM4QN_Z2pdNzgYB7ydI_MqDt4fW8Ce2ajvQeDAOiED_jDgOO6Ib-nA5HoQDgKMGUZnDjG6U7ZFN-ajEkmHw_Y0xpMv2m5Yvv7lxDcUZxdpj4RgbBxcH91DO3vWq4anLzr" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="369" /></span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: x-small;">Source: Wikipedia, Barclays</span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Fast-forward back to 2018, and the spec market is still stubbornly long MXN--expect that to change, soon. </span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="343" src="https://lh3.googleusercontent.com/QCK4Y_GwiSoyUxcrCwUlptdJ3irqAfCZuGLY45folUpY14apbweQ6Yo_Q5N_UJCsgLiPRQScwRGY_TMMDbcOs3g8bcFnPuXDKa998YMGGZTTT66zqJTOhdDvG5-Dbw74Fv6-pleA" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="371" /></span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Bottom line, three factors set up an attractive trade here: </span></span></div>
<ul>
<li><span style="font-size: large;">A big disconnect between political expectations in financial markets and reality</span></li>
<li><span style="font-size: large;">Strong signs the market is remembering the divisive, undisciplined AMLO of 2006, and ignoring his broad popularity combined with the utter disgust for the establishment, </span></li>
<li><span style="font-size: large;">A currency that has been pushed along by a macro tailwind, ignoring the local scene,</span></li>
<li><span style="font-size: large;">A vol market that is mis-pricing the timing for a panic--or at least giving you good odds to bet on a shock sooner rather than later. </span></li>
</ul>
<div>
<br /></div>
<span style="font-size: large;">So take your pick--buy USD/MXN outright if you think the USD selloff is overwrought, sell MXN vs. an EMFX for a market neutral position, or buy vol to provide some upside for a relatively quick realization that AMLO is likely to be the next president of Mexico. </span><br />
<ul style="margin-bottom: 0pt; margin-top: 0pt;">
</ul>
<div>
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre;"><br /></span>
<span style="font-size: large;">Shawn</span><br />
<a href="mailto:TeamMacroMan@gmail.com"><span style="font-size: large;">TeamMacroMan2@gmail.com</span></a><br />
<span style="color: black; font-family: "arial"; font-size: 11pt; font-variant-east-asian: normal; font-variant-numeric: normal; vertical-align: baseline; white-space: pre;"></span><br />
<a href="https://twitter.com/EMinflationista" target="_blank"><span style="font-size: large;">@EMInflationista</span></a></div>
EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com23tag:blogger.com,1999:blog-34323687.post-56166290414421864512018-02-08T15:31:00.000+00:002018-04-14T02:12:45.511+01:00XIV Post-Mortem: We Honor the Dead<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<div dir="ltr" style="line-height: 1.656; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">I’m tempted to leave sorting through the short-vol/XIV wreckage to the rest of the financial blogosphere. I mean look, we’ve all been around the block--as Matt Levine at Bloomberg said, it isn’t that complicated, you <i>bought</i> a product that was short something, that something went up 100%. Your equity is wiped out. Thanks for playing, we have some lovely parting gifts for you.</span></span></div>
<b id="docs-internal-guid-c23c475e-760c-e202-b9f5-f1c89c0a199c" style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.656; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">This isn't shadenfreude. I take no joy in the destruction. I simply find it amazing that someone with a ton of firepower figured out exactly how and when to crush the world’s most liquid market at just the right time, and in just the right way to trigger a massive vol puke. It was like a boxing match where there is little action for nine rounds, then one guy takes a punch, hesitates momentarily, and then gets clobbered by a vicious, match-ending combo.</span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.656; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Congratulations on your squeeze, whoever you are. It was a thing of beauty, and I’m sure there was champagne and steaks for all when the XIV-enemy was vanquished and victory was declared. Just don't fool yourself into thinking you're creating any real value.</span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.656; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="417" src="https://lh4.googleusercontent.com/XGHlePXynDPL_yMUvikpPbVzJZEKUXkQ0geTh-gQs6RISwp9Utdv3RoHGgLBC8_78-5owHgoQHXkq7clx5z-sYdTVMFVawCMVKCiVQYybHDUtrOw55eE5tNUSFq-fu78wnWihiEr" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.656; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Meanwhile in risk-parity land, there were more than a few nervous managing directors as the financial media swarmed around the idea that robots triggered the meltdown. Just to be on the safe side, Bridgewater and AQR </span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; vertical-align: baseline; white-space: pre-wrap;"><strike>put out a joint press release</strike></span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> </span><a href="https://www.wsj.com/articles/is-this-obscure-wall-street-invention-responsible-for-the-market-selloff-1518085802" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">were quoted in a WSJ article today in defense of risk-parity</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">. </span><span style="background-color: transparent; color: #333333; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">“It is definitely not driving global asset prices. It just sits there like a turtle,” Bridgewater CIO Bob Prince said. “We have done pretty much no trading in risk parity” Cliff Asness of AQR said.</span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.656; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: #333333; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">I’m sure that’s true, but it highlights how this was an orchestrated squeeze rather than a real crisis. Spoos may have taken a big dump, but market liquidity backstopped the selloff once strong hands figured out what was going on. So AQR and Bridgewater didn’t have to do anything--they just let their models keep doing their thing. They had little to fear from outflows or any type of financing squeeze for their leveraged positions. They won’t be so fortunate when this type of event happens in the midst of a real liquidity crisis that strangles financing capacity.</span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.656; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">What happens next--there are a few points short term: The quant folks at JP Morgan think this shock to systematic trading/short vol “asset class” will generate as much as $100bn in outflows from these strategies. I don’t think that has a macro impact other than to leave less of an offer for vol when the market stress subsides. That means lower asset values and wider credit spreads at the margin, but not dramatically so. Second, I agree there is likely still a residual hedge to be unwound for whoever is wearing the position that Credit Suisse dumped on them when the market went berserk earlier this week. They will find a way to parcel it out over time--that’s what these guys do.</span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.656; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">The mentality--or flows-- to make money from short gamma and/or tighter ranges within a rising, low-vol, risk-on market isn’t dead. I continue to believe this event won’t permanently break the market, but I do believe it could be remembered as the event where we should all have known quant strats and yield-chasing have gone too far. It reminds me of mid-2007, when Northern Rock blew up. I remember a prominent newsletter author saying at the time that the market had to give up a big whale….and Northern Rock was it. Well, the market had to give up a big whale alright, but it wasn’t Northern Rock.</span></span></div>
<span style="font-size: large;"><br /></span>
<br />
<div dir="ltr" style="line-height: 1.656; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">XIV is far from a whale--heck, it isn’t even a Northern Rock. XIV is more like a small trout some big bank or hedge fund just pulled out of a river. This market isn’t out of kerosene quite yet.</span></span></div>
<div dir="ltr" style="line-height: 1.656; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><br /></span></span></div>
<div dir="ltr" style="line-height: 1.656; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;">Shawn</span><br />
<a href="mailto:TeamMacroMan@gmail.com"><span style="font-size: large;">TeamMacroMan2@gmail.com</span></a><br />
<a href="https://twitter.com/EMinflationista" target="_blank"><span style="font-size: large;">@EMInflationista</span></a></div>
</div>
EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com30tag:blogger.com,1999:blog-34323687.post-63623427497602958212018-02-05T20:58:00.000+00:002018-04-14T02:12:31.902+01:00We Interrupt Normal Programming for....Vol!<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="337" src="https://lh4.googleusercontent.com/R0YkregCsC_d31ZHKCISfO8bewGc1kQZ2LjEkbbsBRpaZlrEb_cKLcElzwBplEwplYAllCcB8vECIdcTstnyJqKH_ZVW3_Nyo4G7s6qm-J6d97UanlyGDkBWAoi0EJ7Qtp-JTSo8" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></span></div>
<b id="docs-internal-guid-1e1bebe9-67b6-5744-833a-c50efd977fdd" style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Alright, so at some point in the next few weeks, we’re going to be able to start analyzing markets again without simply writing off the most recent price action to bubble-mania, bitcoin flows, stock-and-trade momentum, or any other fanciful unintelligible metric of your choice. </span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><br /></span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Let's go to the facts:</span></span></div>
<ul style="margin-bottom: 0pt; margin-top: 0pt;">
<li dir="ltr" style="background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; list-style-type: disc; text-decoration: none; vertical-align: baseline; white-space: pre;"><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">The Treasury curve is bull steepening, indicating there isn’t much of a change in long-term sentiment, but a modest re-pricing of short-medium term expectations for the hiking cycle. </span></span></div>
</li>
<li dir="ltr" style="background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; list-style-type: disc; text-decoration: none; vertical-align: baseline; white-space: pre;"><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">More to the point, there hasn’t been a big bounce back, FTQ flow, or simply a material reversal in UST term yields. Look, there’s another 30bps to go in UST 10yr before we get to where we started the year. And I repeat, the long bond at 3% and a 30yr fixed mortgage at 4.25% won't bring the economy to a screeching halt. </span></span></div>
</li>
</ul>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="371" src="https://lh4.googleusercontent.com/YW0Inp5VDAPyaaNGXs-kaW7g6_DNsAlsMassw8G641mxnuJGFd2zO9VBFoKqN-iN_YgiNw9S58yPrxhlFBPIMWfz0OBQsU6pJhIvTIMXBY_eAbqQI-Mh9S2UXMdqp5zA1kZ_sPIx" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></span></div>
<ul style="margin-bottom: 0pt; margin-top: 0pt;">
<li dir="ltr" style="background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; list-style-type: disc; text-decoration: none; vertical-align: baseline; white-space: pre;"><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Sticking with rates...credit markets aren’t showing any stress either--HY is down less than 1% for the day, and IG credit indices are something like 4bps wider on the day. Color me unimpressed with this state of panic--not two years ago that type of vol was just another day at the office. </span></span></div>
</li>
<li dir="ltr" style="background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; list-style-type: disc; text-decoration: none; vertical-align: baseline; white-space: pre;"><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">And looking at another of our favourite markets, the USD is far from reversing...in fact we’ve just now given up a week’s worth of gains in DXY. Not much to speak of here, until we start looking at the 1.20 level in EUR, or taking out 112 in JPY. </span></span></div>
</li>
</ul>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="365" src="https://lh6.googleusercontent.com/Ks3LNXAL23L9ohccr3QJL7BMu4a0Sc5FC5kIT3n4hI4A6hF0TwXdVHnU43ksyAFkRhyuSa6AmwYb7cx4bvLBgxNaI1rFrJY8exreOtOyk1hZ7992vQuxXSyEDHrzX3QC6Qr3383V" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<ul style="margin-bottom: 0pt; margin-top: 0pt;">
<li dir="ltr" style="background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; list-style-type: disc; text-decoration: none; vertical-align: baseline; white-space: pre;"><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Similarly, if I were to do something reckless like use usd/mxn as a proxy for global EM currency risk appetite, it is clear there is a long way to go to reverse out recent gains: </span></span></div>
</li>
</ul>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="359" src="https://lh4.googleusercontent.com/QlgdYhcgBCxC5LdJOPYspBXI2CJvhPjfgtxSoNat5_84aWU9Q-tax7U0DiCEtxeG2MZtfOJkuiWzH6klJfqGDZt2fTQ5R6Y7_Z2Hp7BwOOQtikxx23b_E-pGPv7z5P9LEJuZkCbh" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<ul style="margin-bottom: 0pt; margin-top: 0pt;">
<li dir="ltr" style="background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; list-style-type: disc; text-decoration: none; vertical-align: baseline; white-space: pre;"><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Meanwhile, more prosaic markets--yet those linked to global demand and the manufacturing cycle, have been stable, nearly boring. Take a look at the copper chart, which has lulled traders to sleep, despite “accelerating global growth” being the talk of the town: </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="371" src="https://lh5.googleusercontent.com/g7rVckQEDIBzeEf8SsaVqmeVoPiUMO0yMtthfbUN00pr92mMUQSb-z55EH8kVrdbRWhG2WaWGwFEkto5hbyky3_McyQGgyTCUS1xRcGgt5qvePt2efrrTcx55pIJD4Lwa_QHX4FZ" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">At this point, it appears we’ve burned off the 5-6% outperformance in the US equity market...a market that nearly the whole world said was some combination of illusionary, a “melt-up”, driven by January retail flows, or simply nuts...all with relatively little collateral damage.</span></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">So what’s going on? Can this degree of vol really be isolated to such a deep, liquid market? Let’s take a look at the chart that ties it all together….frequent commenters know what’s coming next:</span></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="360" src="https://lh4.googleusercontent.com/5AGJeJA8oC1-d8cBDbq3OgkvVdlM9l5Nchdm3pCg7XHYHebgdirunlUvq8BuftA9Hwc6goZF65TuyS6DvtQXm8oJsFzaqwN9unjHOoGCBKzgfKVIGu-vgdr5fROqxWCFvZBrRjnd" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"> </span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">That’s the VIX, going out today above the magic 30 level, higher than only one other data point in the past five years, which was right after the Chinese destructo-deval of August 2016. Put another way, this measure would indicate we're at levels to suggest widespread panic, blood in the streets, and margin departments gang-pressing Park Avenue passers-by into temporary service. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Now stop and think about just how complacent this market has become, just how much money has flowed into short vol, or gasp, levered short vol, how pension funds now think short vol is a high-yielding asset class, and how there is just a ton of traders that have gotten fat and happy collecting short gamma nickels. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">The gamma check has come due...never send for whom the bell tolls; it tolls for thee. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">With the S&P looking set to close at late December support levels, the overarching message is there isn’t a genuine change in macro sentiment, but rather a reversal in a market that had simply gone too far, too fast dependent on an avalanche of money, momentum and hope. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">I don’t want to use the term “healthy correction”, especially in a market that was high on financial amphetamines rather than "healthy" to begin with. Yet there is little evidence to suggest this selloff is global in nature but is instead blowing off the exuberance of the past couple of months. Will it continue? I’m skeptical the party is over--I see no reason to change my optimistic view of foreign assets....but the sordid <i>short volatility</i> tale may just be getting going. </span></span><br />
<span style="background-color: transparent; color: black; font-family: "arial"; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><br /></span></span>
<span style="font-size: large;">Shawn</span><br />
<a href="mailto:TeamMacroMan@gmail.com"><span style="font-size: large;">TeamMacroMan2@gmail.com</span></a><br />
<a href="https://twitter.com/EMinflationista" target="_blank"><span style="font-size: large;">@EMInflationista</span></a></div>
EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com74tag:blogger.com,1999:blog-34323687.post-1081861902884434952018-02-02T04:52:00.002+00:002018-02-02T05:04:04.101+00:00Old Correlations Die Hard: Stocks and Bonds Tandem Sell-OffSay it ain't so!<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgS7fQdIC3fRB2oTEcllisEt-lxABPWT6ysWOjp0ym9WjPOylRjVzDlt29ec8WFwNbCT3zzR-C-QpJNCn5zy7nRHf0rRmCqYP2KLVNUcX6yz5QJPxTo-P1xUvxDtzdfivy94dBS/s1600/20180124+Bond+Market+Meme.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="414" data-original-width="552" height="300" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgS7fQdIC3fRB2oTEcllisEt-lxABPWT6ysWOjp0ym9WjPOylRjVzDlt29ec8WFwNbCT3zzR-C-QpJNCn5zy7nRHf0rRmCqYP2KLVNUcX6yz5QJPxTo-P1xUvxDtzdfivy94dBS/s400/20180124+Bond+Market+Meme.jpg" width="400" /></a></div>
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Most younger industry professionals (myself included) have only participated in the markets during the regime of risk on/risk off. You know, when stocks go up, bonds go down (and stocks never go down). However, I try my best to learn as much market history as possible as it is the best teacher for navigating the financial markets.<br />
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In the midst of this "bloodbath" of S&P falling ~2% in the last few sessions, we've seen stocks fall - What?!<br />
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Even more shockingly, we've also seen bonds sell off at the same time - How?!<br />
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Well, I recall long ago when watching Paul Tudor Jones' Trader documentary where he actually used rising bond prices and decreasing yield as a potential clue to rising equity prices (something I have alluded to in the past).<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg2Pc9qnh0wHQn2bgHAERRQmHrUK1uUVxgNNhrZSq0Tn1m_UqMxj84pxYFamB69gsz6O_hs69T8bDqFjCrcPH2znSs170nt7rcYvNXKhzG6x1SnbnZt51zNty9BcqyoEODxmva5/s1600/20180130+PTJ+Sneakers.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="463" data-original-width="696" height="265" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg2Pc9qnh0wHQn2bgHAERRQmHrUK1uUVxgNNhrZSq0Tn1m_UqMxj84pxYFamB69gsz6O_hs69T8bDqFjCrcPH2znSs170nt7rcYvNXKhzG6x1SnbnZt51zNty9BcqyoEODxmva5/s400/20180130+PTJ+Sneakers.jpg" width="400" /></a></div>
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Clearly, I was obligated to look at the correlation further. Cue commandeered chart from PIMCO:<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhRbvWkPzYh8GNfKz9wpax0wVPydazDvhzNULdbFykjys_2ZsOhO6BJCAioHKwg-DOmE4MYVpnV6a227gfg51U6UroNybnKS7EJZ-pkVwHpuQ_nwO9inqrvTlTudaweRoHOhHzH/s1600/20180130+Historical+Bond+vs+Stock+Correlation.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="606" data-original-width="715" height="542" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhRbvWkPzYh8GNfKz9wpax0wVPydazDvhzNULdbFykjys_2ZsOhO6BJCAioHKwg-DOmE4MYVpnV6a227gfg51U6UroNybnKS7EJZ-pkVwHpuQ_nwO9inqrvTlTudaweRoHOhHzH/s640/20180130+Historical+Bond+vs+Stock+Correlation.JPG" width="640" /></a></div>
We are in a negative correlation regime today. However, the key word here is "regime". This is not a permanent state and should be treated accordingly. We should focus on potential causes for this relationship to revert. These periods last for prolonged periods of time, and thus the quants <span style="background-color: white; color: #222222; font-family: inherit;">are too focused on "recent" (the last decade) of data to care.</span><br />
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Then you have <a href="https://www.wsj.com/articles/why-illinois-got-out-of-the-hedges-1517440169"><span style="color: blue;">this guy from the Illinois state pension fund</span></a>.<br />
<blockquote class="tr_bq">
<span style="font-family: inherit;"><br /></span><span style="color: #333333;"><span style="font-family: inherit;">Industry “experts” suggested we keep these investments to diversify our holdings and reduce overall risk. Yet we already owned bonds for that purpose.</span></span></blockquote>
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Unfortunately, even for some market veterans, the warnings from history are not always heeded.<br />
<span style="background-color: white; color: #222222; font-family: inherit;"><br /></span> <span style="background-color: white; color: #222222; font-family: inherit;">I took a look at a different time frame based on daily and weekly returns data.</span><br />
<span style="background-color: white; color: #222222; font-family: inherit;"><br /></span> <span style="background-color: white; color: #222222; font-family: inherit;"><i>Daily return correlation</i></span><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiDpwhTWCbZAebap5z5YyoHbcsHqarVScDUV8aDaqcjZbNrrXEaBcZsWnbUt8_EXox5NQY-3lUnLoC-nW5BA9KdZvTPmxjrBvzjtg2SfjVV98bOCW8OztiQS8V5h51Wn9qvV4Qo/s1600/20180130+SPX+Bonds+60+Day+Correlation.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="725" data-original-width="1192" height="388" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiDpwhTWCbZAebap5z5YyoHbcsHqarVScDUV8aDaqcjZbNrrXEaBcZsWnbUt8_EXox5NQY-3lUnLoC-nW5BA9KdZvTPmxjrBvzjtg2SfjVV98bOCW8OztiQS8V5h51Wn9qvV4Qo/s640/20180130+SPX+Bonds+60+Day+Correlation.JPG" width="640" /></a></div>
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<i><span style="background-color: white; color: #222222; font-family: inherit;">Weekly return correlation</span> </i><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjnb3QVo-GMBXQjI5aZ3zGA9j-3AyMs80ESP4SREb1GwwhK5VnBmsZ161580VbeAIVeQi-uaPwWEw1Uts_6_Ru9qIGpWA9ZYFQDtFzWYTaZX-DB2twCTGdujkwffax8PfQZmA72/s1600/20180130+SPX+Bonds+60+Week+Correlation.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="654" data-original-width="1128" height="370" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjnb3QVo-GMBXQjI5aZ3zGA9j-3AyMs80ESP4SREb1GwwhK5VnBmsZ161580VbeAIVeQi-uaPwWEw1Uts_6_Ru9qIGpWA9ZYFQDtFzWYTaZX-DB2twCTGdujkwffax8PfQZmA72/s640/20180130+SPX+Bonds+60+Week+Correlation.JPG" width="640" /></a></div>
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In the last few weeks, we have seen a small bump up in correlation and general trend higher for the last year.<br />
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I know I've written extensively about inflation <span style="color: blue;"><a href="http://macro-man.blogspot.com/2017/11/case-study-can-gold-rally-along-with.html"><span style="color: blue;">here</span></a> </span>and <a href="http://macro-man.blogspot.com/2017/09/soapbox-thought-piece-on-long-term-view.html"><span style="color: blue;">here</span></a>. Disregarding fears of being branded that guy who's an inflation bug; here goes nothing.<br />
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Inflation once again is the key here. It will be the source of the next drawdown - a drawdown for both equities, fixed income, and high yield.<br />
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1) contrary to popular CNBC pundits' beliefs, stocks are not a good inflation hedge in the case of high inflation. Here is an excerpt from the newest edition of Intelligent Investor by Ben Graham with commentary by Jason Zweig.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjQmFZF6IQImfcELFH-R-VjJJOHQCnRfrPJahMTEETVe_IGNx4XMM04FzM971Brskx27XDQi41sC6Xzl_-bNUgHT5dolyDLLi3P1g47hWOuuv0aIh7YBw1wv9na2oBxgEq3_Fwl/s1600/20180130+Stocks+vs+Inflation+Intelligent+Investor.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="616" data-original-width="1046" height="376" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjQmFZF6IQImfcELFH-R-VjJJOHQCnRfrPJahMTEETVe_IGNx4XMM04FzM971Brskx27XDQi41sC6Xzl_-bNUgHT5dolyDLLi3P1g47hWOuuv0aIh7YBw1wv9na2oBxgEq3_Fwl/s640/20180130+Stocks+vs+Inflation+Intelligent+Investor.JPG" width="640" /></a></div>
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<blockquote class="tr_bq">
<span style="font-family: inherit;">While mild inflation allows companies to pass the increased costs of their own raw materials on to customers, high inflation wreaks havoc—forcing customers to slash their purchases and depressing activity throughout the economy.</span></blockquote>
<span style="font-family: inherit;"> A negative 10% nominal return on stocks can easily materialize even in a 3% inflation environment. </span><br />
<span style="font-family: inherit;"><br /></span> <span style="font-family: inherit;">Furthermore, a rise in inflation expectations will undoubtedly lead to a rise in nominal yields purely from the calculation of the nominal yield from real yield + inflation expectation.</span><br />
<span style="font-family: inherit;"><br /></span> <span style="font-family: inherit;"><br /></span> <span style="font-family: inherit;">2) Structural reasons for a combined sell off also lies with the emergence of risk parity based investing. I've <a href="http://macro-man.blogspot.com/2017/05/market-volatility-reports-of-my-death.html"><span style="color: blue;">written about this in the past as well</span></a>, as a form of a potential catalyst for increasing equity market volatility and an equity market drawdown. </span><br />
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<div style="background-color: white;">
<span style="font-family: inherit;">The drawdown controls for these funds do indeed work to sell off all assets across the board when volatility rises, building in structural reasons why markets can sell off in a cascading fashion. </span></div>
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<span style="font-family: inherit;">However, I want to note one major strategy change in my analysis: the asset class that will be affected is fixed income in TIPS or in the credit market.</span></div>
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<span style="font-family: inherit;"><b>Since treasury volatility is a fraction compared to that of an equity index, risk parity funds must lever up its exposure to achieve the equal diversification of risk. As this has occurred, we've also experienced a tremendous bull market in bonds, killing off any hints of volatility. Which means that bond positions are even more levered than they otherwise would be in a higher volatility environment.</b></span></div>
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<span style="font-family: inherit;"><b><br /></b></span></div>
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<span style="font-family: inherit;">The negative correlation between stocks and bonds and their coinciding bull markets have fueled both the hedging and outperformance of risk parity. </span></div>
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<span style="font-family: inherit;">In my previous experience at my previous firm, the inflation bucket for risk parity holds not commodities due to its high/frequent roll costs but instead inflation-linked fixed income products - the product that I was in charge of trading. You can extrapolate the chart below to be true for inflation-linked bonds as well.</span></div>
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<span style="font-family: inherit;">Historical real returns of nominal bonds:</span></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhD297d6i4oKm-de91eJiX-aI2Wk5D3kFDkkrsavl5Wy-XJ0wOLuJx8toCKqs53Pm2ZHQEn8XgNvO9Sgo9pwjGCicI4rjAbjeyuMtuLI-1QESYJn2pHakPnTMUgbwfePLmc35WF/s1600/20180130+Total+Return+of+Bonds+Historical.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="381" data-original-width="572" height="426" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhD297d6i4oKm-de91eJiX-aI2Wk5D3kFDkkrsavl5Wy-XJ0wOLuJx8toCKqs53Pm2ZHQEn8XgNvO9Sgo9pwjGCicI4rjAbjeyuMtuLI-1QESYJn2pHakPnTMUgbwfePLmc35WF/s640/20180130+Total+Return+of+Bonds+Historical.png" width="640" /></a></div>
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<span style="font-family: inherit;">Due to the OTC nature of TIPS (lack of centralized limit order book), the product lacks liquidity. We had already experienced severe problems trading switches and during drawdowns for French and UK linkers, and similar but slightly milder issues rolling and trading large programs in TIPS.</span></div>
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<span style="font-family: inherit;"><br /></span></div>
<div style="background-color: white;">
<span style="font-family: inherit;">Credit is another bucket of risk parity. They also trade OTC. although historically boasting a higher volatility, the performance in credit since 2008 has also meant relatively sizable positions in credit must be built into the credit buckets of these portfolios as well. It is well documented how illiquid this asset class can become during times of economic or financial market stress.</span></div>
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<span style="font-family: inherit;"><br /></span></div>
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<span style="font-family: inherit;">During a cross-firms sell-off of risk parity, it would be easy for dealers to sniff out these large programs in TIPS and credit being moved at the same time. As a result, I suspected, they would simply <b>shift mid-price far from the inter-dealer mids to take advantage, thus raising volatility further - potentially enough to compound additional drawdowns in a reflexive cycle.</b></span></div>
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Recent risk parity sell-offs:</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjvfqO-Wn72Z3FZLppYgHdLA-AltN4z-VIzURQt77eymuvgXCQT9MXO8Lg6mJ-AA9QePrp0jrvc5gd6tM5hSpEvevp7MRR2HiWbHEGrQHPcJWrJAtJSO9Y6_rjQHxjI-FcuVm-P/s1600/20180130+Risk+Parity+Drawdowns.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="1043" data-original-width="1224" height="544" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjvfqO-Wn72Z3FZLppYgHdLA-AltN4z-VIzURQt77eymuvgXCQT9MXO8Lg6mJ-AA9QePrp0jrvc5gd6tM5hSpEvevp7MRR2HiWbHEGrQHPcJWrJAtJSO9Y6_rjQHxjI-FcuVm-P/s640/20180130+Risk+Parity+Drawdowns.jpg" width="640" /></a></div>
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<span style="font-family: inherit;"><b>In conclusion:</b></span></div>
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<span style="font-family: inherit;"><br /></span> <span style="font-family: inherit;">To be clear, I know the short bonds trade is a crowded consensus trade at this point in time; in fact, we could be close to reversal to shake out some late arrivals to the party. Also, calling the top in equities has been a strenuous and fruitless exercise. This post is not a specific short-term market call regarding those assets.</span><br />
<span style="font-family: inherit;"><br /></span> <span style="font-family: inherit;">What I am trying to address is that this negative correlation labeled as risk on-risk off is cyclical, and the shift in cycles can potentially last a decade(s). I believe the inflation will be at the crux of the change and the beginning of the next correlation cycle. People like the Illinois pension guy, as well as other investors are clearly relying on this current correlation regime to hold.</span><br />
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These long everything investor of 2018 should tread carefully. The road you're on won't always suit the car you're driving.</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh-KdNSuKO9UeLnaFEurw9-2UZgIuQWNDyGXnrzFtUiVEl7pFcFxADvjlq487OevfB18dLoI2lRuSl0kII4GE8QCrrz5C3oQAKoFOu3XaoS5L-KUTayWvals5nh3jIoPxB6LGwP/s1600/20180124+Speculator+Meme.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="375" data-original-width="500" height="300" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh-KdNSuKO9UeLnaFEurw9-2UZgIuQWNDyGXnrzFtUiVEl7pFcFxADvjlq487OevfB18dLoI2lRuSl0kII4GE8QCrrz5C3oQAKoFOu3XaoS5L-KUTayWvals5nh3jIoPxB6LGwP/s400/20180124+Speculator+Meme.jpg" width="400" /></a></div>
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Happy NFP Friday!</div>
Macro Clownhttp://www.blogger.com/profile/17196568155114537578noreply@blogger.com59tag:blogger.com,1999:blog-34323687.post-26733160469840017532018-02-01T04:25:00.001+00:002018-04-14T02:12:10.199+01:00Alan Greenspan Lives...In the Chinese Credit Markets<span id="docs-internal-guid-6574eb12-4f99-40c0-f393-bfe1f93c3153"></span><br />
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<span id="docs-internal-guid-6574eb12-4f99-40c0-f393-bfe1f93c3153"><span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Happy Trails, Janet Yellen. I liked Janet--it took me a while to get past the "Auntie Janet from Brooklyn" accent--but when you look back on her record, she pulled back the reins on tightening policy when the market was uncertain (or to put it another way, heaving all over itself). I remember saying to some colleagues in early 2016 that the fed would blow up the global economy if they followed through on their dot plot four hikes for that year. Janet pieced together the risks from the slowish economy and strong dollar and put the hiking cycle on ice.</span></span></span></div>
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<span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">And then she went for it when the skeptics said it was too much, too fast in late 2016 and early 2017. Here we are, at a level of interest rates that many thought would smother the economy not three years ago. </span></span></div>
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<span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Maybe a couple of years from now we'll look back at this 2005-2006ish market and say, "wow, the fed really blew it allowing such easy monetary policy back then," not unlike the revisionist criticism of Greenspan we hear today.</span></span></div>
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<a href="https://www.bloomberg.com/news/articles/2018-01-31/former-fed-chair-alan-greenspan-sees-bubbles-in-stocks-and-bonds" style="text-decoration-line: none;"><span style="color: #1155cc; font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Speak of the devil....</span></span></a></div>
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<span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="322" src="https://lh6.googleusercontent.com/FPup8LWlZlDHG432upyNqHf9Rt2NMw1GDTPcvg_BQwNAf_2a1zuZPIg2Ssk6DZG1NYzwSRlrYPK2EMeV8qbR_-SbJJllmsTQpZc2UYlTcIwyjKSrXJR8XnAVU_YOaZpPeBDyo8pO" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="584" /></span></span></div>
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<span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Let’s go in the way back machine...back to the days before iphones, before Tom Brady….back to the days when a man could be a man...and not tweet about it...December 5th, 1996: </span></span></div>
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<span style="font-size: large;"><span style="background-color: transparent; color: #222222; font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;">Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. But how do we know when </span><span style="background-color: transparent; color: #222222; font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;">irrational exuberance </span><span style="background-color: transparent; color: #222222; font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;">has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?...</span><span style="color: #222222; font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;">But </span><span style="color: #222222; font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;">we should not underestimate or become complacent about the complexity of the interactions of asset markets and the economy.”</span></span></div>
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<span style="font-size: large;"><span style="color: #222222; font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;">—Alan Greenspan, </span><a href="http://www.federalreserve.gov/boarddocs/speeches/1996/19961205.htm" style="text-decoration-line: none;"><span style="color: #663366; font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;">"The Challenge of Central Banking in a Democratic Society"</span></a></span></div>
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<span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Maybe that criticism wasn’t so revisionist after all. Take heed...if Greenspan’s record repeats itself, this bubble may have only another four, or arguably another eleven years to run. </span></span></div>
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<span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">The day after the famous “irrational exuberance” speech, risk markets were a global tank-fest as bond and equity traders assumed the Maestro was about to take the punchbowl away. But today, risk markets are to the point that they are defying analysis. Credit spreads are reluctantly grinding tighter, but you can see it is getting harder and harder with each passing bp. Again, looking back to the mid-00s, there's a certain limit to how tight credit spreads can trade but there's no limit to how long it takes credit to show signs of deterioration. </span></span></div>
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<span style="font-size: large;"><span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;">I don't see it out there, in fact, there are signs that even the Democrats agree that maybe we were a little too tough on those Wall Street guys...yes, there may be </span><a href="https://www.nytimes.com/2018/01/15/us/politics/democrats-banking-rules.html" style="text-decoration-line: none;"><span style="color: #1155cc; font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;">more credit and accomodation in the pipeline.</span></a><span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"> More on this next week. </span></span></div>
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<span style="font-size: large;"><span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;">Moving back to EM--aka the short-seller killing fields--earlier this week the brilliant Michael Pettis posted a long but </span><a href="http://carnegieendowment.org/chinafinancialmarkets/75355" style="text-decoration-line: none;"><span style="color: #1155cc; font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;">fascinating article on China, growth, and credit.</span></a><span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"> </span></span></div>
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<span style="color: #333333; font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">“Everyone agreed that debt in China is still growing far too quickly relative to the country’s debt-servicing capacity, but the pace of credit growth seems to have declined in 2017, even as real GDP growth held steady and, more importantly, nominal GDP growth increased….”</span></span></div>
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<span style="color: #333333; font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Put another way, credit growth slowed….but it didn’t. Growth kept on cranking. </span></span></div>
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<span style="color: #333333; font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Yes, yes, we didn’t all come here today to dig up the debate about the veracity of Chinese growth figures. But that’s what I found so fascinating about this piece. Pettis goes on: </span></span></div>
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<span style="font-size: large;"><span style="color: #333333; font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;">“I am not convinced that observers have seen the beginning of any meaningful deleveraging….Chinese bankers—like those in the rest of the world, no doubt—have always gamed regulatory constraints when it comes to credit creation…. Beijing has been worried about China’s growing debt burden since at least 2012. But in 2017, this issue has become almost an obsession in some quarters. Beijing has made a series of aggressive announcements in the past year testifying to this surge in concern, culminating in an </span><a href="https://www.caixinglobal.com/2017-10-20/china-must-guard-against-minsky-moment-pbocs-zhou-says-101159201.html" style="text-decoration-line: none;"><span style="color: #3d71b7; font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;">October 2017 statement</span></a><span style="color: #333333; font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"> by PBoC Governor Zhou Xiaochuan, who warned that China could face its own “Minsky moment.”</span></span></div>
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<span style="font-size: large;"><span style="color: #333333; font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;">One way of (reducing credit growth) is to push credit creation off balance sheets and into forms that are less likely to trigger regulatory reprisals. That Chinese bankers might be doing so is confirmed by both anecdotal and official evidence indicating faster-than-expected credit growth in categories that fall outside widely watched measures like TSF….</span><span style="color: #333333; font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;">this would mean that China has experienced not the beginnings of deleveraging, but rather a continuation of the trans-leveraging observers have seen before. ” </span></span></div>
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<span style="color: #333333; font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"> </span></span></div>
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<span style="color: #333333; font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">He goes on to highlight the stark contrast in the way the West thinks about GDP compared to the Chinese. In China, the GDP is an input. In the West it is an output. Here, you put a bunch of labor and capital into the meat-grinder and get something we call “total output” of the economy. In China, the government tells its bureaucrats, provincial governors, and banks what the output is, and they have to figure out how to get there. </span></span></div>
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<span style="font-size: large;"><span style="color: #333333; font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;">Then the PBoC starts to crack down on credit growth and leverage. The governor even uses the term </span><a href="https://www.caixinglobal.com/2017-10-20/china-must-guard-against-minsky-moment-pbocs-zhou-says-101159201.html" style="text-decoration-line: none;"><span style="color: #1155cc; font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;">“Minsky moment.”</span></a><span style="color: #333333; font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"> Heck, even Greenspan never did that. Even when there was one. </span></span></div>
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<span style="color: #333333; font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Yet that doesn’t change the marching orders for the bankers and provincial governors. If they need to build a bridge to nowhere so they can chalk it up to the GDP number, they’ll do it. And they’ll find a way to get the money to do it, through “public-private partnerships”, SPVs, wealth management vehicles, or whatever works to keep the wheels turning. Writing down the loan on this type of unproductive economic activity, wherever it comes from, is what we like to call a “tomorrow problem.” </span></span></div>
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<span style="color: #333333; font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Pettis goes on to state the obvious: this charade is possible only so long as the system has the debt capacity--be it on a bank balance sheet or in the back alley of a deserted third tier Chinese housing estate--to keep it going, and that’s only possible so long as the zombie-assets aren’t required to be written down by regulators, auditors or creditors. </span></span></div>
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<span style="color: #333333; font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Regardless, sooner or later, even the massive pool of Chinese domestic savings will be exhausted, and the day of reckoning will arrive. </span></span></div>
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<a href="https://www.bloomberg.com/news/articles/2018-01-31/china-s-11-trillion-bond-market-is-winning-foreign-investors" style="text-decoration-line: none;"><span style="color: #1155cc; font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Or will it? </span></span></a></div>
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<span style="color: #333333; font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="310" src="https://lh6.googleusercontent.com/G0b7y2KsF50H2Gj7hZdN9frjB0E47QpkqhlHnO8DJZl_yHa8HXtEePB18PSJJ-dJOklLNVTFCpfQZ_QwTlyIIsJMvGNpQOrNNLGQWfpVU0u2xOT_kbNll4cS9MdozYri7VC3iyMA" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="553" /></span></span></div>
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<span style="color: #333333; font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">The US is getting ready to ease restrictions on bank balance sheets and credit creation, just in time for China to open its bond markets to foreigners and start waving in billions of JP Morgan bond index money. </span></span></div>
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<span style="color: #333333; font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Heaven help us...are we in 2006 again, or is it 1996? Tally ho! </span></span><br />
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<span style="font-size: large;">Shawn</span><br />
<a href="mailto:TeamMacroMan@gmail.com"><span style="font-size: large;">TeamMacroMan2@gmail.com</span></a><br />
<span style="color: #333333; font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"></span></span><br />
<a href="https://twitter.com/EMinflationista" target="_blank"><span style="font-size: large;">@EMInflationista</span></a></div>
</span>EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com10tag:blogger.com,1999:blog-34323687.post-56397540423678349322018-01-30T17:34:00.000+00:002018-01-31T04:47:00.644+00:00AUDNZD Revisited - Inflation and A Berning Socialist Experiment First of all, sorry for this slightly outdated post, but I wanted to go through with it as it is something I've been trying to get off my plate for a while...<br />
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Good old AUDNZD...it seems like forever since this pair has been floating around the cellar of its historical range.<br />
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I've written about this <a href="https://macro-man.blogspot.com/2017/04/audnzd-how-much-can-it-run.html"><span style="color: blue;">pair in the past here</span></a> (we could've caught some small moves in the past, I am still swimming in this ocean looking for the big fish of a return) - the large range that it trades between is largely reflective of the business cycle between the two countries and the close tie between the two economies (although that link is largely a one-way street where New Zealand depends on Australia)<br />
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<b>As the market slowly starts mulling over the possibility of rising inflation - I had the crazy idea that going long the pair can be a viable and innovative way to express that exposure.</b><br />
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<b>First thing's first: why would it reflect an exposure of rising inflation?</b><br />
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Like we've detailed in the past, the pair trades closely in line with the relative terms of trade between the two countries.<br />
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<img src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgSpB_C_zcf1EFPscq_Aokfzl931cIyzuPAJine6SYWhR0mxWIqAWYKZ5i8eQaqaSYM5BZYr6EvAuU4m1j5WttHakHKUEHt8ubXAHF8bi5WV1PA9WxHOzTptxGe3n8R0VYxrB_K/s640/20171224+AU+vs+NZ+Terms+of+Trade+Long+Term.JPG" /><br />
<img src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj4u3FvnuyOZf2X_JzzdfKWhRv3QEsyOz8GKxtx19df-2Y-btlERcZPWEji7iD4t2jS1IyzOCVGP4bodJGOg_J21S_NSDvOJh6w4gk3K1kye2Brfimfgl6UUqXIwzZmIoWlS3nL/s640/20171224+AU+vs+NZ+Terms+of+Trade.JPG" /><br />
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So let's extrapolate that - if you have a bull market in commodities what would happen?<br />
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Well, back in 2005 - 2011 when we had a bull market in almost all commodities, AUDNZD traded up to historical highs of the range - yes, agricultural products were in a bull market as well.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj-bw5-GX2dsh2cPdlY1IkqkbXi17PW0A-FvU6ZcakA4kj4i03svtRRhoiPAtrIXqSngla9O02tb0g2QN4uQGJ5qhqqRUZ59DrlZ2VFvSG97QIcP1Smttr9LSrPh9gB8RItx3M-/s1600/20180130+CRB+Index.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="315" data-original-width="1000" height="200" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj-bw5-GX2dsh2cPdlY1IkqkbXi17PW0A-FvU6ZcakA4kj4i03svtRRhoiPAtrIXqSngla9O02tb0g2QN4uQGJ5qhqqRUZ59DrlZ2VFvSG97QIcP1Smttr9LSrPh9gB8RItx3M-/s640/20180130+CRB+Index.jpg" width="640" /></a></div>
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If we were to have a repeat of this type of inflationary pressures (the bull market for energy, metals, and grains), I would speculate a similar response for the commodities index as well as AUDNZD.<br />
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In addition, there are a couple of recent developments that I find interesting here:<br />
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The fundamental trends between the two countries' economies continue to trend favorably of a higher AUDNZD (from historically bad levels). Furthermore, divergence in Central Bank action as well as some very interesting political developments in New Zealand and the RBNZ that can potentially be very impactful.<br />
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<b>Looking at this further:</b><br />
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<b>1) Let's look at some other fundamental factors:</b><br />
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The economy through the lens of unemployment has been in favor of New Zealand over Australia for the better part of almost 4 years. It seems to have stabilized - with the way the global economy has started to grow, I would think the "worst" has been priced in.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgl-XSK-29A9i8Jcux8d0LhIV_uJAwVsrLuCA9FwdQPZBea9CoqnXELIiJVsKnUcGGumpGdH6LALhRiCq_e-3XNHjzRFgsdoPJRib83uwQLCmofVeu_erLX9a-tj-wu1fZfbhYk/s1600/20171224+AU+vs+NZ+Unemployment+vs+AUDNZD.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em; text-align: center;"><img border="0" data-original-height="510" data-original-width="1257" height="259" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgl-XSK-29A9i8Jcux8d0LhIV_uJAwVsrLuCA9FwdQPZBea9CoqnXELIiJVsKnUcGGumpGdH6LALhRiCq_e-3XNHjzRFgsdoPJRib83uwQLCmofVeu_erLX9a-tj-wu1fZfbhYk/s640/20171224+AU+vs+NZ+Unemployment+vs+AUDNZD.JPG" width="640" /></a><br />
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<br />
Looking at the rates market with inflation accounted for we have started to see a bottom and a divergence between the two countries if we don't get a horrific outlier of a miss.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjzePEU7yRLHAUEFuBZgZjkFxmfCneBJCEMdrJxt5-T2Tgfp2phIegHDGCcvxSJp9Cs_TKPxgX1VZKP0-q6HnF2M8wYpF-FP42Yp3teyGyVtDu8TxFogqiGe-yrPGzUca4-xffr/s1600/20171224+AU+vs+NZ+Real+Rate+Diff.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em; text-align: center;"><img border="0" data-original-height="598" data-original-width="1110" height="344" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjzePEU7yRLHAUEFuBZgZjkFxmfCneBJCEMdrJxt5-T2Tgfp2phIegHDGCcvxSJp9Cs_TKPxgX1VZKP0-q6HnF2M8wYpF-FP42Yp3teyGyVtDu8TxFogqiGe-yrPGzUca4-xffr/s640/20171224+AU+vs+NZ+Real+Rate+Diff.JPG" width="640" /></a><br />
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<i>*Real rates calculated via extrapolated CPI.</i><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj0C2N2H5MDyRX8xARdnJDcsZ93L0I5Jiu2gPJRqzPE4AEfZzDDm_aRCkINQgvbC7pSfGjm-un5VHRDlPeOAsKCayQW-LmVUZukn_yxUYQXWsZoHvH0T_kmFKLLM65KbEFMyVw7/s1600/20180130+AU+NZ+CPI+Diff.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="484" data-original-width="1010" height="306" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj0C2N2H5MDyRX8xARdnJDcsZ93L0I5Jiu2gPJRqzPE4AEfZzDDm_aRCkINQgvbC7pSfGjm-un5VHRDlPeOAsKCayQW-LmVUZukn_yxUYQXWsZoHvH0T_kmFKLLM65KbEFMyVw7/s640/20180130+AU+NZ+CPI+Diff.JPG" width="640" /></a></div>
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<i>**Using AU CPI print projected at 0.8% from Westpac</i><br />
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I assume a continued divergence would lead to eventual central bank action:<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEipOjMgvq4m0568oQAKcHsgtz4T72IWAve_MKTZKx-iswlHlocl87FQefmIg7A3iLZY1tTP9Up901CAIpl9zll-p0rdQ1jZ0GagzXNZBsb9R0YO7zlpZxtV3W6fSYjpYFinj9cJ/s1600/20171224+AU+vs+NZ+Central+Bank+Rate+Diff+2.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="583" data-original-width="928" height="402" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEipOjMgvq4m0568oQAKcHsgtz4T72IWAve_MKTZKx-iswlHlocl87FQefmIg7A3iLZY1tTP9Up901CAIpl9zll-p0rdQ1jZ0GagzXNZBsb9R0YO7zlpZxtV3W6fSYjpYFinj9cJ/s640/20171224+AU+vs+NZ+Central+Bank+Rate+Diff+2.JPG" width="640" /></a></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjK31W1J8f9_fVdpemZHObrsing1LTkaRBHJMh_g2WOx8aImxlvkMap_vAqOWYZ5AzohzCyxoyc1annjnVZbCP0cwMn_RPjRtzHk2ZIQqXVIpvlPtJc8YlSCKv93VhW6yLl73ru/s1600/20171224+AU+vs+NZ+Central+Bank+Rate+Diff.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="589" data-original-width="976" height="386" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjK31W1J8f9_fVdpemZHObrsing1LTkaRBHJMh_g2WOx8aImxlvkMap_vAqOWYZ5AzohzCyxoyc1annjnVZbCP0cwMn_RPjRtzHk2ZIQqXVIpvlPtJc8YlSCKv93VhW6yLl73ru/s640/20171224+AU+vs+NZ+Central+Bank+Rate+Diff.JPG" width="640" /></a></div>
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<b>2) The Bernie Sanders experiment is officially underway in New Zealand.</b><br />
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The newly elected prime minister of New Zealand, Jacinda Ardern is described as the following:<br />
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-Political allies NZ First (a socially conservative party with a hint of xenophobia) and the Greens (your stereotypical green party)<br />
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-Wants jobless rate to fall to 4% from 4.8%, in turn probably support reform the RBNZ (<a href="https://www.bloomberg.com/news/articles/2017-10-29/rbnz-reform-could-potentially-lower-rates-finance-minister-says"><span style="color: blue;">Link</span></a>) to focus on not only inflation but also full employment<br />
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-Doesn't like immigration, blames it for rising housing costs<br />
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-Wants to restrict trade<br />
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To me, she does not remind me of Macron or Trump as some media outlets have stated. To me, she's much closer to Bernie or Elizabeth Warren, especially when it comes to the economic policies.<br />
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New Zealanders, are you ready to feel the Bern?<br />
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Since Ardern is set on forcing the rate of unemployment lower, and the finance minister has explicitly stated the intention to have the RBNZ change its focus to include full employment, it is probably to assume that their next Governor appointment will focus on pushing through said agenda.<br />
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The full employment and low and steady inflation dual mandate are comparable to that of the US Fed - <b>the two mandates contradict each other: if there is true full employment, inflation would be ripping; if there is low and steady inflation, chances are you are unlikely at true full employment.</b><br />
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<b>The two dynamics demand some favoritism towards one. I would assume the favor would be towards unemployment with Ardern. </b><br />
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What does that mean? Well looking at WIRP <i>at the end of the year in 2017 (apologies for the outdated data)</i>, it seems that the market is suspecting that there will is a 75% chance for a hike in 2018 despite the RBNZ explicitly stating that they will keep rates lower for the next two years! Depending what the market prices throughout the year, there could be good risk-reward for a fade.<br />
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I would deem the risk of a hike as overpriced.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiPeJKT84P38xyzBcNei6yRDX_fhwZLgy3dF9hdAd5gN4XicICGf_CExoVk1-IEvKM0aQqaTI1KJbqmxK-OM0iH7GIYSt2hSB1Ro2O1PVUAbU2v9w7vVSXn5SHWGG9gtnSUmTMZ/s1600/20171224+NZ+WIRP.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="655" data-original-width="1389" height="301" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiPeJKT84P38xyzBcNei6yRDX_fhwZLgy3dF9hdAd5gN4XicICGf_CExoVk1-IEvKM0aQqaTI1KJbqmxK-OM0iH7GIYSt2hSB1Ro2O1PVUAbU2v9w7vVSXn5SHWGG9gtnSUmTMZ/s640/20171224+NZ+WIRP.png" width="640" /></a></div>
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<br />
In addition, revisiting the fundamentals above, it wouldn't surprise me if they actually <i>lowered</i> rates before they raise them. From a historical perspective, it wouldn't be out of the question.<br />
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On the other hand, Australia WIRP at the end of last year was pricing in the similar odds for a hike as New Zealand. The differences here is where I think presents the opportunity. Ultimately, this economy is one that is trending upwards from lows and can get a push from rising metals and energy prices - especially if you buy into the concept of higher inflationary pressures.<br />
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Contrarily, I would deem the risk of a hike underpriced here.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgDCAHLGKwCXGrkkyXQEWEIQrqIN6Ubcl3TZcNvDDZ0pDnbFVWKouiplYeayB9qf9soif8217-ylD5mCz3qEBkr0WasKYr6xQqmv06c-JeXPoB5NQ8rSyzk8YZQK0qEgVSXV4Wc/s1600/20171224+AU+WIRP.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="653" data-original-width="1392" height="300" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgDCAHLGKwCXGrkkyXQEWEIQrqIN6Ubcl3TZcNvDDZ0pDnbFVWKouiplYeayB9qf9soif8217-ylD5mCz3qEBkr0WasKYr6xQqmv06c-JeXPoB5NQ8rSyzk8YZQK0qEgVSXV4Wc/s640/20171224+AU+WIRP.png" width="640" /></a></div>
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<br />
<b>Conclusion:</b><br />
<br />
I believe AUDNZD looks like a good way to short NZD and express a long overall inflation view. To purely play the developments in New Zealand, trading the short end rates curve in NZD is also another way to potentially play it. However, if I recall correctly, NZD rates were relatively illiquid. To purely play the inflation view, one can always simply go long AUD by itself, but you expose yourself to USD risk. In my opinion, the fact that the pair is near the bottom of the range introduces convexity to the trade.<br />
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<b>What can go wrong:</b><br />
<br />
AUDNZD obviously has both the Aussie and Kiwi components - I believe if inflation rises, one can potentially make money on the trade even without the NZD scenario of the RBNZ lowering rates materializing...However, if I am terribly wrong regarding the Australian economy and/or rising inflation, you can be at risk as well for your Kiwi view. Conversely, if I am terribly wrong about New Zealand, you can be at risk for your inflation view.<br />
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Decisions, decisions. A decision that I'll leave up to you.<br />
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Macro Clownhttp://www.blogger.com/profile/17196568155114537578noreply@blogger.com15tag:blogger.com,1999:blog-34323687.post-72353115628771801832018-01-26T04:36:00.000+00:002018-04-14T02:11:54.013+01:00Minnesota Real Estate, the S&P 500, Treasury Bonds, and You<span id="docs-internal-guid-62bb58ae-30c1-341f-0390-c5c27534dcc1"></span><br />
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<span id="docs-internal-guid-62bb58ae-30c1-341f-0390-c5c27534dcc1"><span style="font-family: "arial"; font-size: large; vertical-align: baseline; white-space: pre-wrap;">Stocks are partying like it's 1999. Bonds are selling off, well...like it's 1999. And yeah, real estate in the US is having a good run too, finally showing some signs of life after a long period of something between ok-ish and abysmal returns. </span></span><br />
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<span id="docs-internal-guid-62bb58ae-30c1-341f-0390-c5c27534dcc1"><span style="font-family: "arial"; font-size: large; vertical-align: baseline; white-space: pre-wrap;">What’s really going on? This is anecdotal evidence--but let’s take a look at the anatomy of a real estate deal from the depths of the financial crisis and cashed out in today's feeding frenzy. </span></span></div>
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<span id="docs-internal-guid-62bb58ae-30c1-341f-0390-c5c27534dcc1"><span style="font-family: "arial"; font-size: large; vertical-align: baseline; white-space: pre-wrap;"><img height="371" src="https://lh3.googleusercontent.com/n2kXJSPxTcU-8rHJSQxVo3gBFbft_dhrqsPyhPDSHzSsClr-gBGIk9sz3UcV1Coheq61zKDYxmj7aaFQ4nDzU-OTKJ3-7yaD-_aNkZY_hLdNyb5n135U1ckVp6lGNOD_CQ4mZ9pq" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="348" /></span></span></div>
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<span id="docs-internal-guid-62bb58ae-30c1-341f-0390-c5c27534dcc1"><span style="font-family: "arial"; font-size: large; vertical-align: baseline; white-space: pre-wrap;">This dandy townhome just sold a few months ago in a neighborhood a few miles from my house. It is a beautiful place...1700 square feet, three bedrooms and three baths, enough space for a small family with great schools. You see the list price above….after a little bit of haggling it sold for $263,000. </span></span></div>
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<span id="docs-internal-guid-62bb58ae-30c1-341f-0390-c5c27534dcc1"><span style="font-family: "arial"; font-size: large; vertical-align: baseline; white-space: pre-wrap;">In early 2012, the same place sold in foreclosure for $193,000. The buyer bought it with cash and rented it out for an average of $1750 per month over the last (roughly) five years. </span></span></div>
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<span id="docs-internal-guid-62bb58ae-30c1-341f-0390-c5c27534dcc1"><span style="font-family: "arial"; font-size: large; vertical-align: baseline; white-space: pre-wrap;">I ran the costs and revenues through a real estate spreadsheet I built and got this: </span></span></div>
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<span style="font-family: "arial"; font-size: large; vertical-align: baseline; white-space: pre-wrap;"><img height="53" src="https://lh5.googleusercontent.com/3azvRowu3kir24LfCtyOen_cMHwqht4BIvvIh-MZMy7T06SSHvyZg7E339EDMDvb9nsV4xB10P7V14rmo1InIQIlDwfp8JjNcmFO6RX9Q-GYuZdpH1PSAb5JXGWA_07YvrT-x68J" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="251" /></span></div>
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<span style="font-family: "arial"; font-size: large; vertical-align: baseline; white-space: pre-wrap;">An unlevered compounded return of nearly 12%. Not bad for what is really a fixed income asset. </span></div>
<span style="font-size: large;"><br /></span><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-family: "arial"; font-size: large; vertical-align: baseline; white-space: pre-wrap;">But what was our benchmark? I ran a similar calculation through a calculator I found online for the S&P 500, which considered the total return of the index with reinvested dividends. Here was the result: </span></div>
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<span style="font-family: "arial"; font-size: large; vertical-align: baseline; white-space: pre-wrap;"><img height="504" src="https://lh3.googleusercontent.com/5JG35Uzxy8kKectbh99OFUUt4CZgSnLLf2AsZlEGX3kvBtQjJmhaxgdZaBQ9HhJ71_Vzr_KweJdfX7Rjfl1Qd_vS5Ij5rmrw8F7sjqsn1cWd-imc8lK2Ohtdmm3pasn9pEaeAxIT" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="597" /></span></div>
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<span style="font-family: "arial"; font-size: large; vertical-align: baseline; white-space: pre-wrap;">Over the same time period, that money would have returned 14.26% in a simple S&P index fund with reinvested dividends. Equities outperformed….</span></div>
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<span style="font-family: "arial"; font-size: large; vertical-align: baseline; white-space: pre-wrap;">Not so fast, you say. You’re comparing a fixed income asset to an equity asset. Yep, apples to oranges. Real estate, especially if unlevered, has certain equity and fixed income characteristics. I took a look at the total return on a JP Morgan credit index over the same time period. It was right around 4%. </span></div>
<span style="font-size: large;"><br /></span><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-family: "arial"; font-size: large; vertical-align: baseline; white-space: pre-wrap;">So if I were to have some mix of stocks and bonds and maybe some REITs that had high single digit returns, the return over the last five years looked a lot like the return on a chunk of Minnesota real estate.</span></div>
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<span style="font-family: "arial"; font-size: large; vertical-align: baseline; white-space: pre-wrap;">Then I think about the implicit returns built into the price of the assets when they were purchased. Five years later, those prices should be able to tell us something about the returns we can expect (or have realized) in the future. </span></div>
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<span style="font-family: "arial"; font-size: large; vertical-align: baseline; white-space: pre-wrap;">For the townhouse, the implicit return, or the cap rate, at the time of the purchase was about 7.25%. That’s a pretty spicy return in these parts--this townhome is in a tony neighborhood, and one that has only gotten more exclusive in the last five years as more high-end condos have been built in the area and the city has become a destination for fancy restaurants and brew pubs. In short, more rich people want to live there now than did five years ago. </span></div>
<span style="font-size: large;"><br /></span><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-family: "arial"; font-size: large; vertical-align: baseline; white-space: pre-wrap;">Today, the cap rate on the same property is about 5.7%. So the future cash flow you can expect from the property at current valuations is roughly 150bps less than it was five years ago. That represents the confidence in current values as well as the relative attractiveness of the asset---people are willing to pay more for the same thing today versus five years ago, when the US was at the nadir of a the credit cycle. </span></div>
<span style="font-size: large;"><br /></span><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-family: "arial"; font-size: large; vertical-align: baseline; white-space: pre-wrap;">Now look at stocks. In 2012 the S&P sold at a price/book ratio of roughly 2.2. Today that ratio stands just above 3. To put it another way, not unlike our chunk of Minnesota real estate, buyers of stocks today are putting much more weight on the future profits on their assets relative to the book value where they could be sold on the open market. </span></div>
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<span style="font-family: "arial"; font-size: large; vertical-align: baseline; white-space: pre-wrap;">S&P 500 Price/Book Ratio.</span></div>
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<span style="font-family: "arial"; font-size: large; vertical-align: baseline; white-space: pre-wrap;"><img height="281" src="https://lh6.googleusercontent.com/kR4NUxbPdZTt1TXVQ1ZiPY-ziLhUTPeJPU1E-txZcUQ-gvdyxWgg-QbsZOsTQKIo-acnqUD9jhh_iVzQRGAGJODkga7kJujFxlleqO9ULgpINARojX22B9RpEh_nul2A6p-XFEFD" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></div>
<span style="font-size: large;"><br /></span><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-family: "arial"; font-size: large; vertical-align: baseline; white-space: pre-wrap;">Ok, so maybe I’m not telling you anything you don’t know already--assets in the US are worth much more than they were five years ago. But what struck me about this analysis was just how close the returns were. This is a piece of real estate that was clipped in foreclosure at the bottom of the market, and then punted into a red-hot market five years later, in a neighborhood that was a good one in 2012, but now is one of the most exclusive you’ll find anywhere in flyover country. You could hardly ask for anything more as a real estate investor. </span></div>
<span style="font-size: large;"><br /></span><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-family: "arial"; font-size: large; vertical-align: baseline; white-space: pre-wrap;">And you compare that to stocks--where the same argument applies! US stocks in 2012 weren’t exactly dogs...now they are the a red hot, multiple offer property that brokers salivate over because they know people are tripping over themselves to buy them. </span></div>
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<span style="font-family: "arial"; font-size: large; vertical-align: baseline; white-space: pre-wrap;">Throw in a few high-yield USD bonds, which have benefited from the same lust for yield, and you can see a pattern: there is no small amount of financial engineering and monetary steroids that have led to a such a wide array of assets having such a similar rate of risk-adjusted return. </span></div>
<span style="font-size: large;"><br /></span><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-family: "arial"; font-size: large; vertical-align: baseline; white-space: pre-wrap;">Then I look at a chart like this, follow the path of appreciation of those assets, and wonder what the future might hold as the slope of the line turns negative: </span></div>
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<span style="font-family: "arial"; font-size: large; vertical-align: baseline; white-space: pre-wrap;"><img height="313" src="https://lh4.googleusercontent.com/nSg95d1j1sj1bNgIG7ozQiCMez7Wvd7dt-YT9rxLs_zz9Ozfg-stZ87Uzu8ow9ByqvdKJrUgLDxZsFO4xfPNGMU97m4k_RBA9v1pBTdeU21dXTUR-TIy657NwDmsyZMLqLcLU6_S" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="443" /></span></div>
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<span style="font-family: "arial"; font-size: large; vertical-align: baseline; white-space: pre-wrap;">I agree with the camp that argues that the global economy is coming out of a long period of dormancy--one not uncorrelated with the chart above. I think the recession in the US didn’t really end in late 2009 simply because the economy started growing again--it lasted well into 2012 as capital writedowns and a Schumpeterian creative destruction slogged through the American landscape. </span></div>
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<span style="font-family: "arial"; font-size: large; vertical-align: baseline; white-space: pre-wrap;">Where does that leave investors today? Many would argue the implicit returns baked into metrics like the real estate cap rate or the equity price/book ratio cited above will be pathetic. That may well be. But as investors we have to consider where there could still be some upside. </span></div>
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<span style="font-size: large;"><span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;">I’ll put my two cents in for emerging markets. Last week, </span><a href="https://www.gmo.com/docs/default-source/public-commentary/gmo-quarterly-letter.pdf?sfvrsn=50" style="text-decoration-line: none;"><span style="color: #1155cc; font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;">Jeremy Grantham made a great case for EM equities</span></a><span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;">. I’ll throw in my two cents for EMFX and local fixed income at large, which are driven by very similar dynamics around the global manufacturing cycle and commodity prices. </span></span></div>
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<span style="font-size: large;"><span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;">I think it comes down to this:</span><span style="color: #222222; font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"> the benefits of the crash in oil prices combined with increased domestic energy production was a positive supply shock for the US. This caused a huge re-pricing and redirection of flows out of EM and into the US, despite continued massive quantities of global monetary accommodation. </span></span></div>
<span style="font-size: large;"><br /></span><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="color: #222222; font-family: "arial"; font-size: large; vertical-align: baseline; white-space: pre-wrap;">US assets, real, fixed income and equities, were winners throughout the past ten years, but especially since 2015 as this positive supply shock spread throughout the economy. But EM assets hit a huge wall during the same time. Now, with a pro-growth, deregulatory environment in the US and Chinese demand still positive, there is plenty of space, from "macro" as well as valuation influences, for EM to continue to outperform--while much of that positive tail wind is already priced into US equity values. </span></div>
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<span style="color: #222222; font-family: "arial"; font-size: large; vertical-align: baseline; white-space: pre-wrap;">You can argue that something will change to cause that theme to crack (China slowdown, US grinds to a halt, quanatative tightening, some black swan, etc.) but I think that's the environment we're in for the foreseeable future. The returns from the past five years have been predicated on a monetary sugar high--and one could make money by simply chasing that ball from one jurisdiction to another.</span><br />
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<span style="color: #222222; font-family: "arial"; font-size: large; vertical-align: baseline; white-space: pre-wrap;">Today, investors are getting back to fundamentals: relative rates of growth and productivity rather than the potential, or reality of artificial stimulus. </span><br />
<span style="color: #222222; font-family: "arial"; font-size: large; vertical-align: baseline; white-space: pre-wrap;"><br /></span>
<span style="font-size: large;">Shawn</span><br />
<a href="mailto:TeamMacroMan@gmail.com"><span style="font-size: large;">TeamMacroMan2@gmail.com</span></a><br />
<a href="https://twitter.com/EMinflationista" target="_blank"><span style="font-size: large;">@EMInflationista</span></a></div>
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</span>EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com37tag:blogger.com,1999:blog-34323687.post-67266179748152643492018-01-19T18:28:00.003+00:002018-04-14T02:11:39.676+01:00Apple Making America Great Again? For IG Bond Spreads Not So Much <div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Now that the market is taking a bit of a breather from shoveling USD and its fixed income products onto the bonfire, we can step back and take a look at one of the late 2017 themes that may--or may not--be starting to play out in 2018. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">The US tax reform has exited the sausage-making process and gone into effect. We are starting to get the headlines about the impact: last week it was retailers like Walmart promising bonuses and wage increases, this week, Apple--that bastion of far-right economic conservatism--is pledging to Make America Great Again:</span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="131" src="https://lh5.googleusercontent.com/VfLH7D6-HrFx3IGzMJFCXndzonJFRtgY83FAGRnZMrnrdn5xmBM8hAii775l-EnoXlavuJDzGMFcfdbFXKyL-kOE6gNw333WtGbzu9n-L4pqAbt9OJWciMadzIjOFe8pekL1ecTd" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="504" src="https://lh6.googleusercontent.com/siSLKc8cgCp00wjrhuF2Z4NUIDW4xY-PeVa7o182PUAWUGgqgVpM6URixrdIHpA7N-7Y25jYfvpWYyveSDT7uwiXJFJnigF5HoMkrDNTKCYG-8ROEKukB5Tab-CztHP5tFUUCLUO" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="473" /></span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Did anyone check Tim Cook’s tax returns for donations to the Trump campaign? Just askin’. </span></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Yet with all that money comin’ home, a funny thing happened on the way to making America Great Again. The USD has gotten whipped like a lame horse: </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="300" src="https://lh6.googleusercontent.com/-pNahURiwpQR4YGwwVikzCBDOd8jpePOXlzlxJTMYSgtil3n-g3eCKX6HVyl_U702YaXw1W50E53Z0w619o61vkuskAZYGubKEE0ljPqC3uGHDWkpfW9LIzOfdER-fjdYZtMG957" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="514" /></span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">So what gives? Aren’t companies like Apple repatriating billions of dollars from overseas? Why isn’t the market pricing in that flow back into USD? </span></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">This theory--that cash held offshore was somehow by definition denominated in another currency--is an argument built on a sand foundation. Indeed, today </span><a href="https://ftalphaville.ft.com/2018/01/18/2197758/the-apple-story-is-about-corporate-bonds-not-cash-or-capex/" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">an article on FT Alphaville</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> noted something crazy--Apple manages one of the world’s biggest portfolios of corporate debt from an office in Nevada, but the custody of this massive pile of assets is in Belgium, Germany, or some Cayman holdco. And most of that is in or hedged into USD, even if it is in a metaphorical German bank vault.</span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">The particle physicists that keep track of these things at JP Morgan seem to agree. Earlier this week their research team published some estimates of the stock of offshore profits, how much could be repatriated, and where it is held. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="464" src="https://lh3.googleusercontent.com/sGFB-CzHiTvPIrTSOf_dcYlD2_pV32D2mwzQzhfQddxCpbTO1Dyh-wPcCcFP_1-fElfpFPVgSqFZ6VRKzccEPCOLyQsuLnOKhdSKQTPc_CKBoA6jOpx-LnudIzgv3jgv9qQ8xSxM" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="445" /></span></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">By their estimates, of the $2.2trn held offshore, only $460 billion of could potentially be repatriated as an FX flow--15.5% of that would be lost to taxes--leaving $400 billion to come back over a number of years. For FX markets that qualifies as a drop in the bucket--especially when dealing with corporate treasuries that have no pressing need to do this trade tomorrow--they can take their time and drip it out in $10mm sell tickets every day for two years. </span></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">The bigger change that the Apple move illustrates--and alphaville highlights--is the potential for this “cash” to go back to shareholders. The offshore cash isn’t really cash anyway--more often it is held in high grade corporate debt. More than any potential change in the structural value of USD, these moves by corporate treasurers--combined with higher rates-- might mark a regime change for inflows into IG corporate markets, and a low in high-grade spreads.</span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="313" src="https://lh3.googleusercontent.com/yHbT9VLQor51RWSMHn-yp8gNeRmFeYvO2_b0pJvP49sFpmEYAgIzmDVjKBXy4GJPq-9IWm3tjqGz2V9VDUCOHNxES7CeZ84u2HFFSTHq1RxvkLirnexT9dRcf_NrXZjSd0QDN7-L" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Or maybe we’re in 2004….the point is not that this change in flows into corporates is going to blow spreads out to UST+300bps overnight, but the demand for paper to continue spread compression might have dried up. As FT Alphaville points out, there’s no reason why Apple--or any other company with billions of offshore profits-- needs to fire sale these assets, and there are still investors tripping over themselves to reach for yield in </span><a href="https://www.bloomberg.com/news/articles/2018-01-18/zimbabwe-s-mnangagwa-plans-billions-in-compensation-bond-sale" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">some of the world’s weirdest </span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> and </span><a href="https://www.bloomberg.com/news/articles/2017-12-06/it-s-only-2-months-but-angolan-leader-a-hit-with-bond-investors" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">fragile economies</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">. </span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">(insert your own “Trump as EM bond portfolio manager” joke here)</span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">The bigger piece of the puzzle is indeed the quantity of foreign profits already held in USD--because this is what could come back and get sold into the market or allowed to run off into cash to be paid back to shareholders. JPM highlighted this chart for illustrative purposes--showing the known allocations of a few tech giants which are probably managing their portfolios in a similar way to other corporate treasuries. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="303" src="https://lh4.googleusercontent.com/XbD_UFsHtI_BiL87ka1jCtzk9CTlBqHJHME4ziqKH0Z_gxNvziQDlEYReAXRErWZjOVHafPQGFwgYzJhNTbc7u3VQ65Zp5Ew3yHcHAaHqqVSZ6zCq48ElNrWsCVjPNJHGwI9oFTG" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="358" /></span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">These five companies comprise roughly ¼-to-⅓ of the total stock of offshore profits, meaning there could be $600 billion in corporate debt and and equal amount of US treasury and agency bonds that could--if not hit the market--not be available for re-investment at maturity. Sure, these are huge markets as well, but even if you parcel out $600bn in these markets over five years, you’re still talking about a significant amount of supply that will need to find another home.</span></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">So what’s the trade? I think this is another reason to flee high-grade credit risk, and while the tax windfall for the federal government will pad the fall for UST and agency borrowing rates, again--it is just another headwind for rates at large. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Sure, if global growth rolls over or if inflation catches fire later this year this type of flow won’t mean much for the direction of rates--the broader point is that the key flow from the US tax reform is in corporates, not FX. The long-term risk-adjusted returns for corporate credit are bad, and the flow outlook just got worse too. Sad!</span></span><br />
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><br /></span></span>
<span style="font-size: large;">Shawn</span><br />
<a href="mailto:TeamMacroMan@gmail.com"><span style="font-size: large;">TeamMacroMan2@gmail.com</span></a><br />
<a href="https://twitter.com/EMinflationista" target="_blank"><span style="font-size: large;">@EMInflationista</span></a></div>
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EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com36tag:blogger.com,1999:blog-34323687.post-89993033202236604122018-01-15T14:26:00.002+00:002018-04-14T02:11:20.749+01:00Keeping It Simple...Bund vs. UST Rates after the EUR rally<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">As the US continues to slog through a winter marked by one sub-zero reading after another, let’s do some KISS trading--keep it simple, stupid. </span></span></div>
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<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Last week the </span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">short USD </span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">theme went from sideshow to the main stage of the market’s three ring circus. As noted </span><a href="http://macro-man.blogspot.com/2018/01/i-cant-shake-this-feelingmore-on-usdjpy.html" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">here</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">, the BoJ woke up to the possibility that the economy is perking up quite nicely, and higher global interest rates caused the YCC flows to dry up, leading to news of a </span><a href="https://www.reuters.com/article/us-forex-yen/japans-central-bank-trims-bond-purchases-prompting-taper-talk-idUSKBN1EY0FF" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">“stealth taper”</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">. Well, if you’re strategy is to buy bonds at a certain yield, and nobody shows up to sell them there, you don’t have much to do! So while I wouldn’t put much stock in the BoJ’s pseudo-announcement that they will be buying fewer long end bonds, nor the flatlining balance sheet--the turn in sentiment and momentum is significant. JPY has finally joined the party, and I think we’ll see correlations to G7 FX increase to historic norms until Kuroda and Co. give us a signal about where the asset-purchase scheme is going next. KISS: stay short USD vs. JPY, scandies and selected EMFX until further notice…</span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">And rates….the UST selloff stalled out last week, despite some very good retail sales and CPI data out on Friday. Maybe the higher rates theme is running out of steam? I think that’s a strong possibility--as I noted last week, I think there is more downside than upside for US economic data, even if that doesn’t mean a reversal in Spoos or UST yields. Let's stick with the theme above--a resurgence in economic growth, investment and outright optimism in countries where the word of the decade has been “malaise”. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Sure, euro-area inflation came out week again, but you can’t ignore this jump in PMI. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="293" src="https://lh4.googleusercontent.com/gpGVLzkBYN0unXjK3wONlNm3WuqbsEuNArWWpVm7f9zFW-SHjEZCWopwiwrN0aI5_2uKtJ2boHjktQDkZTx5q5NPskf_mZTemSIgQ2GwWM-KuekB93NszecCZ7CPU0TxdtmzC1xQ" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="481" /></span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">And look who shows up at the top of the table: France and three of the four PIGS! This resurgence is broad-based, and dragging along countries with significant excess capacity. </span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br class="kix-line-break" /></span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="144" src="https://lh5.googleusercontent.com/-ASGE1NaHMAV-f6JXopqv_qXkl6EjctqVYYlCEhq5VmmwFedVWCvSH89AkfTe0gb54-HOpA0tVT1U5JjbvpOGseMfToz-fgq1lhbUTpBF5WUM7eZRar327E8sdRoWxR0Vs7bB3Wg" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="453" /></span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">The ECB is starting to make some rumblings about how they can retool their asset purchase program. There are a number of things they can do--but easing up on buying duration seems like a good place to start. EUR-strength will be a consideration--but if this move doesn’t continue towards 1.25 I don’t think it will be a factor. </span></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">There still seems like too much complacency in the rates market. You can see in this pic how the correlation to 10y UST has been very strong lately--interesting to note that the correlation early in the year was pretty weak, but is 65% over the past three months. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Yet we saw a big move higher in bund yields late last week driven by the minutes from the last ECB meeting. bunds underperformed UST...which went hand in hand with the strengthening EUR. Given the fundamentals and 10y bund yields still trading inside the highs of last summer, I think yields can continue to move higher from here. I’d be careful with the bund/UST spread since there is a beta component there (if you trade dv-neutral, your long ust/short bund trade can get barbequed on a global move higher in rates) but what I see in the chart here is a spread too cheap given the underlying fundamentals: there is still value in the market pricing in some combination of higher European rates and monetary tightening. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="280" src="https://lh6.googleusercontent.com/5uGExkVGoqkcjVNClHQzwHzVJVbOKH4WndYd5B6H6H0Crc0taI0DGnbXy7adTfsUZpz0Rd2wP8WgSDglp7f1iTu_2HdV_70F1fsn827Rlb0UX9H-KGEguntYLon48cUfzRxhLDZ9" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Then there are articles </span><a href="https://www.bloomberg.com/news/articles/2018-01-11/are-you-missing-out-on-the-great-market-melt-up" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">like this one</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">, which highlights GMO’s Jeremy Grantham abandoning his value-based principles and thinking about just how far this “melt-up” rally in stocks can continue. </span></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">I won’t go into any detail here other than to say this market won’t die of over-valuation. Something will break it. We just don’t know when or why. </span></span><br />
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><br /></span></span>
<span style="font-size: large;">Shawn</span><br />
<a href="mailto:TeamMacroMan@gmail.com"><span style="font-size: large;">TeamMacroMan2@gmail.com</span></a><br />
<a href="https://twitter.com/EMinflationista" target="_blank"><span style="font-size: large;">@EMInflationista</span></a></div>
</div>
EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com35tag:blogger.com,1999:blog-34323687.post-76312686869679637032018-01-12T04:47:00.000+00:002018-04-14T02:11:06.451+01:00Should the Fed Change It's Inflation Target? Please, Stick to the Weather <div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre;"><img height="339" src="https://lh5.googleusercontent.com/39unDscdmzhV9OKr9hVNcMYKk1Srm1JPQEAaZUAVU8r_tvLgsJa5Q9SjLO_tdbhMOr3UJ32tnv_-vFqoOyERJLRCiDqfmIJJcbjZ6l0Djx-obHl9VxoAr8b3Y1LoBwJo_prAasaZ" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="452" /></span></div>
<b id="docs-internal-guid-6fd73112-e8b1-e2a1-0d8a-9ec92b17ad83" style="font-weight: normal;"><br /></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Unless you like in a desert or arctic tundra, it is probably a cultural norm to make small talk about the weather. And eventually, it will come back to the forecast. Weathermen can get tomorrow’s temperature right (most of the time), maybe predict if there will be rain or snow two days out, and maybe get a general idea of what the weather will be like five days down the road. While forecasting has improved over the past few decades, it is a complex system: medium-term forecasting is still largely educated guesswork at best. </span></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Yet we persist in maintaining the myth of inflation targeting. Do central bankers have any better idea of what inflation will be a year for now? Do they even know how to measure it accurately? Has the craft of forecasting inflation a year forward improved over the last thirty years? </span><a href="https://www.reuters.com/article/us-mexico-inflation/mexico-inflation-at-16-1-2-year-high-seen-pressuring-central-bank-idUSKBN1EY1PT" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Consumers in Mexico</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">, and countless other countries just in the last twelve months, can answer with a resounding, “no”. </span></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">And even the monetary chieftains did know how to forecast inflation, would they know what buttons to push to move it to their “target” without unleashing a series of potentially catastrophic unintended consequences? </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">This issue stepped to the fore on Monday when the great monetary minds of the world converged on Washington DC for the </span><a href="https://www.brookings.edu/events/should-the-fed-stick-with-the-2-percent-inflation-target-or-rethink-it/" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Brookings Institution Central Banker Jamboree</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">. The title of the event was, “Should the Fed stick with the 2 percent inflation target or rethink it?” </span></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">San Francisco Fed President John Williams was </span><a href="https://www.wsj.com/articles/fed-officials-encourage-reassessment-of-inflation-target-1515441098" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">on the tape in the WSJ </span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">supporting price level targeting, which is the idea that if you undershoot the inflation target, no worries...you can just make it up later. A previous speech he had this to say about price level targeting: “In a nutshell, the big advantage of this approach is that any surges or drops in the inflation rate need to be made up in the future.</span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;"> This assures that, over the medium term, inflation stays on track, even if policymakers have a very imperfect understanding of the levels of natural rates or other structural changes affecting the economy.” </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">But what if they have a very imperfect understanding of </span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">inflation</span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">? What if they are measuring, just to pull a random example, the annual change in US personal consumption expenditures, but low interest rates are driving crazy amounts of borrowed money into a wide variety of assets, both real and imagined? Would the Fed still be madly shoveling fuel into the QE blast furnace?</span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Yet the central bankers of the world look at the world, stroke their beards, furrow their brows, and think about how they can solve this problem--and manipulate the price of money so they can get it </span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">just right</span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">. In a 20 trillion dollar economy comprised of a system so complex it can scarcely be measured. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">And then there’s the “look through”. How many times have we heard the Fed--or any central bank of your choosing--is going to “look though” this spike in oil prices, or the fall in telecommunication prices, or the rise in medical costs, or the transitory pass through inflation from the depreciation of the currency? </span></span></div>
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<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">As if on queue, after the price level targeting trial balloon took to the skies on Monday, the BIS published a working paper with this clickbait headline: “</span><a href="https://www.bis.org/publ/work688.htm" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Global Factors and Trend Inflation</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">.” </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">The paper seeks to quantify how much foreign factors--mainly commodity prices--impact domestic inflation in an handful of inflation-targeting countries and Asian exporters. Here are the results: </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="315" src="https://lh5.googleusercontent.com/k1srXDtToddGZ2nyO4MdoHajDaBq6XBfV_GJU4gWRLS7ezk4EPT7JnPtobFbgoFFeDq6lPH90h7569Ghb9v58yzdLFIMys89NECAPT5AFoNOZ24_JsxkQaPHmWN9wvVaYm2OC0-N" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="431" /></span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="206" src="https://lh6.googleusercontent.com/hQd0O_6aJ1AAgldE_keWwW7o6b4B_UMCIc5Oc2NMJpSeou7x559cG2c7fWZeXqWg1cYRaXyv3k8WktFFOhlE14FqxtmVc58w1rYZkPOOlNXo3yOZdc02v4yYmhwp3zEpFJPLDZGj" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="530" /></span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="235" src="https://lh4.googleusercontent.com/E9HKw2-y4O7pYynzLaKqTO2ZOlY1qzKvLxhtQurOtz8KC-CY0SziyBznlJ8TNfIwQVwPFAFH37YCfCrB540PINdjmqfbM3GmYzqSKNEiX--kigxBbRSMHRnOqUyJ5K5soei0S3cg" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="501" src="https://lh5.googleusercontent.com/x8aXCYOimF5nVfvdlq3aosH7D6QAVGvcB_gTTOu5ToF4ATJdMBYm16V7MxwCT8kRSefc2n0muK7b8yaquWkBVJWexBOGo0rmUj_MluxRa8PML6x5txNwFZ2lMShqpdmoCLMn0dg4" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="312" /></span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Put another way, with a couple of exceptions, foreign shocks drive 20-40% of inflation depending on which country you’re talking about. While these shocks have less of an impact on “trend inflation”--or the long-term inflation average we might expect to see priced in breakeven prices--they are a huge, and completely exogenous, factor for domestic monetary policy within any predictable growth and inflation forecast horizon.</span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">The authors of the paper see this as a victory for inflation targeting: price shocks hit short-term inflation, but have little impact on the trend. So you can ignore them. I find it disconcerting--how confident can you be in a trend when 20-40% is indisputably a random variable beyond your control? And doesn’t this approach implicitly assume the random variable of foreign shocks is 1) random, and 2) mean-reverting? Both of those assumptions are tenuous at best. </span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"> </span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Yet 2% inflation, or 2% annualized over time immemorial, or some other number chosen from on high, is the right number to manage to. </span></span></div>
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<span style="font-size: large;"><a href="https://economicsone.com/2018/01/09/the-feds-inflation-target-and-policy-rules/" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">John Taylor got into the mix later in the week </span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">as his Taylor Rule got batted around like mouse in a village of feral cats. And it bordered on the sensible: </span></span></div>
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<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 18pt; margin-top: 0pt;">
<span style="background-color: white; color: #333333; font-family: "arial"; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">“First, there is a danger in the way that the numerical inflation target has come to be used in practice. It seems that even if the actual inflation rate is only a bit below the 2% inflation target—say 1.5% or 1.63%—there is a tendency for people to call for the central bank to press the accelerator all the way to the floor. This is not good monetary policy; it is not consistent with any policy rule I know, and it could create excesses or even bubbles in financial markets….”</span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 18pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: white; color: #333333; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Price stability and financial stability. That is a better recipe for keeping the Fed from blowing bubbles rather than anything I’ve heard from John Williams, </span><a href="https://www.brookings.edu/blog/ben-bernanke/2017/10/12/temporary-price-level-targeting-an-alternative-framework-for-monetary-policy/" style="text-decoration: none;"><span style="background-color: white; color: #1155cc; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Ben Bernanke </span></a><span style="background-color: white; color: #333333; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">or even the </span><a href="http://larrysummers.com/2016/03/07/a-world-stumped-by-stubbornly-low-inflation/" style="text-decoration: none;"><span style="background-color: white; color: #1155cc; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">“screw it, let’s just raise the inflation target for a while”</span></a><span style="background-color: white; color: #333333; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> argument made by Larry Summers.</span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 18pt; margin-top: 0pt;">
<span style="background-color: white; color: #333333; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Look, I’m an economist by training. I respect what these guys do, and I admire their quest to improve monetary policy. I’m also a trader who sought to make a living with a 60% hit rate on my predictions and forecasts. Macro trading, weather forecasting and central bankers will always have gods and liars that claim or promise a higher hit ratio than that. But being “right” a lot is really, really hard. As Nobel Prize Laureate Richard Feynman once said, </span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 18pt; margin-top: 0pt;">
<span style="background-color: white; color: #333333; font-family: "arial"; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">“I might be quite wrong, maybe they do know all this ... but I don't think I'm wrong, you see I have the advantage of having found out how difficult it is to really know something. How careful you have to be about checking the experiments, how easy it is to make mistakes and fool yourself. I know what it means to know something. And therefore, I see how they get their information and I can't believe that they know it.”</span></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 18pt; margin-top: 0pt;">
<span style="background-color: white; color: #333333; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">We should take it easy on the weathermen and the economists. They are seeking to quench the very human need for control. Central bankers are doing the job we ask of them--maybe we just put to much on them. Like with most things in life, a little humility can go a long way. Take Taylor’s advice and manage around rules, not numbers. </span></span><br />
<span style="background-color: white; color: #333333; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><br /></span></span>
<span style="font-size: large;">Shawn</span><br />
<a href="mailto:TeamMacroMan@gmail.com"><span style="font-size: large;">TeamMacroMan2@gmail.com</span></a><br />
<a href="https://twitter.com/EMinflationista" target="_blank"><span style="font-size: large;">@EMInflationista</span></a></div>
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<span style="background-color: white; color: #333333; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre;"><br /></span></div>
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EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com9tag:blogger.com,1999:blog-34323687.post-72839885803069532992018-01-08T17:15:00.002+00:002018-04-14T02:10:51.124+01:00I Can't Shake This Feeling....More on USD/JPY<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: white; color: #202020; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="198" src="https://lh6.googleusercontent.com/2sA6RHHn5ZOIqFYE_cGGZ7fRboqgQEEN-vqn61G6pwHqdTAtZlFfwyUgiFtFljkdIICsbIOsp_3L-iw5qV96wiyhhKR2VQ-eb9xs82AyL13q90ZB5GSiLfpf-0dfJaXHVOviwuxH" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="359" /></span></span></div>
<b id="docs-internal-guid-36efdd96-d6c1-9edd-670d-0823035bbb79" style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: white; color: #202020; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Maybe it's just always been too far afield for me, but I think the Japanese yen is the death star of macro trading. There are a vast number of variables that don’t really apply to other FX markets, and your positions exists at the pleasure of the BoJ, which has the power to open fire with this “fully armed and operational battle station” to destroy whatever planet you are living and trading on. And if that’s not enough, it is the funding currency of all funding currencies. So go ahead, spit into that gale force wind. </span></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: white; color: #202020; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">But I just can’t shake JPY...and the possibility it makes a big move stronger this year. In the comment section from last week’s post Johno asked the big question for JPY in 2018: </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: white; color: #202020; font-family: "arial"; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">One question concerning USDJPY I may have posed before is what happens if we get inflation >1% in Japan. Some argue that YCC will remain, or slowly adjust, pushing real rates down and with it the currency. Others argue markets will look forward, anticipating removal of YCC, higher rates, and pushing the currency stronger.</span></span></div>
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<span style="background-color: white; color: #202020; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="223" src="https://lh6.googleusercontent.com/fTKRwfCW3j1sn7gV12FhbgTEY_G2UjatBPD2s4q5YFGJhPKPAjkQALzKDPEEDcVwx7ht88tmFE4mcKpqDGpxHBnwCtc4T85vCuZas0bzOYFTxXCAzA2zThcoKT11zSBJE-TkrcS2" style="border: none; transform: rotate(0rad);" width="400" /></span></span></div>
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<span style="background-color: white; color: #202020; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">I’m in the latter camp. Here’s why. There are a confluence of factors that are pushing the yen towards strengthening. </span></span><br />
<span style="background-color: white; color: #202020; font-family: "arial"; font-size: large; white-space: pre-wrap;"><br /></span>
<span style="background-color: white; color: #202020; font-family: "arial"; font-size: large; white-space: pre-wrap;">The economy is picking up in a way that hasn’t occurred in many, many years. I can bombard you with charts on this one, but I found this one to be particularly telling. Credit growth is picking up, and rising significantly while it is flatlining or decelerating in Europe and the United States. </span><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhHhVeLB-4nIpQiqq_6OZ_JLB-_cnLO-Kvjg15E6ScxU62PpmjADwViezM1285Xu6B8rHPrWxdlJCdj_Q9F80i9rkGqWE8bwCfi_6pHrxXFCBHz4U3bH6hwuxlXWlHgG3ypweFZcg/s1600/japan+credit.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="388" data-original-width="431" height="288" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhHhVeLB-4nIpQiqq_6OZ_JLB-_cnLO-Kvjg15E6ScxU62PpmjADwViezM1285Xu6B8rHPrWxdlJCdj_Q9F80i9rkGqWE8bwCfi_6pHrxXFCBHz4U3bH6hwuxlXWlHgG3ypweFZcg/s320/japan+credit.JPG" width="320" /></a></div>
<span style="background-color: white; color: #202020; font-family: "arial"; font-size: large; white-space: pre-wrap;"><br /></span>
<span style="background-color: white; color: #202020; font-family: "arial"; font-size: large; white-space: pre-wrap;">That says to me that there are good investment opportunities in Japan, and now that there are signs global growth might support an increase in export capacity, businesses (both foreign and domestic) are starting to take advantage of that. That might be the beginning of a turn from a very large industrial battleship. </span><br />
<span style="background-color: white; color: #202020; font-family: "arial"; font-size: large; white-space: pre-wrap;"><br /></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><span style="background-color: white; color: #202020; font-family: "arial"; vertical-align: baseline;">Second, the Yen is cheap. Really cheap. </span><a href="https://www.themacrotourist.com/posts/2017/12/01/yen/" style="background-color: white; text-decoration-line: none; white-space: pre;"><span style="color: #1155cc; font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;">MacroTourist started me thinking along this line a few weeks ago</span></a><span style="background-color: white; color: #202020; font-family: "arial"; vertical-align: baseline;">, and I guess I’ll just put my spin on what he said:</span></span></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">JPY has been left behind by every other DM currency in the great USD-fire sale of 2017:</span></span></div>
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<span style="background-color: white; color: #202020; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="280" src="https://lh5.googleusercontent.com/8Gg62kz8sR94dVCRSQ8VhsVrvC-gRTQvDhhXwdosXkruFyuQRVVzT4WPfYsfrp266fas9rIArh4kYDxzDU3-5dT5MJzK_c9_HjLByQ46ZhamHQquuDFFZPo6pxzma-MBmLsrJpLN" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Including against KRW, which has appreciated markedly as the BoK has taken its foot off the intervention pedal, and amazingly, moved to finally hike rates. Tough to envision a break of 9.00 here now that <a href="https://www.bloomberg.com/news/articles/2018-01-08/won-swings-to-loss-as-korean-government-warns-of-stern-steps" target="_blank">the Korean government is calling time on the strong won</a>.</span></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: white; color: #202020; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="238" src="https://lh3.googleusercontent.com/hr7nvF7F35LuK0EOq1n30X5PHL3WP45uXrzZ7wVm2wXh8jyTMg5DoLsDB3UFOVy1WZZ8fKnmf7bnf8OkKcDPrYhrIJtYX4-oEEaEVsAejf-wtMkYWwtzveQzRlSJt4ml-lANQQMZ" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="435" /></span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: white; color: #202020; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">That’s nominal rates...but real rates, or purchasing power parity valuation, show an even more attractive picture. USD is roughly 20% rich to JPY on a PPP basis. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="349" src="https://lh5.googleusercontent.com/WZv8sbz0dFnBx6WZ4Fmhrx-feGfFq82y2Npm6SCzGybzoITCfKzC3l2qINcVL8WMadFi2nP3spxPKRDe-ClwzkCtZeV5W--9DjlyzfNXjkUA1XVFgycS1m-jzb7gv1MIdNg9zOlW" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="408" /></span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">And as I have noted in the past (repeatedly, I’m afraid) the BIS real effective exchange rates shows the yen skulking at the bottom of the table for DM FX: </span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="306" src="https://lh3.googleusercontent.com/0_fnysa2u9ey8cOitTbcqQa0cGVz4oxkpXzSPelJebEon-a-HmbeNUEEwRfNqld_eKpcI-yejW8bPJgSgtaUpD87QJN27hftgpi0icdZYJHfczFqwvW_SpxykhPjb_giRRe_YWz-" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="574" /></span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">All this, despite the fact there is little evidence of a breakdown in the relative productivity of the Japanese and US economies: </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="484" src="https://lh5.googleusercontent.com/N31TbLg0zE6Ik8VHduZeMWiuIPMh088LixY48Eg7i2a3b14E2LhUwAqyrWDawN6XSnkAR9791uWCRr5VdD4dTR9MWEbYpGs_K-Y0xWs4W1kvX1bu6KUfDoz2qMfRDTGO8c02eWyO" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="577" /></span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Right...so some mysterious force….the dark side, the light side….we don’t know which...is sandbagging the yen. What could it be? </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Yep, it’s this....The BoJ's printing press: </span></span></div>
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<span style="background-color: white; color: #202020; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="292" src="https://lh4.googleusercontent.com/FwA-Yf00lHWSs149mONwtyX0PobVjqtpJQbvnY7z9kJXj0M7dExBF10YdNBQlb6cWHlrE5-Ir-Q6MslV2dfc5u0joBwkcdeZ5Id1i3BkXhJkMCow0nWGiXVl7uAr8t4kttzUawE5" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="471" /></span></span></div>
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<span style="background-color: white; color: #202020; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">I could argue until I’m blue in the face that a chart like that can’t go on forever--but maybe it could! This gets back to the crux of Johno’s point--will the BoJ keep the pedal to the metal, or will the market price in an easing of this reality TV episode of “The World’s Most Extreme Central Bankers”? If you poke around the street and “fintwit”, various forces will argue that there is already a “stealth taper” from the BoJ. If you look at their total assets, that might be true, but without any official word from Kuroda and Co., it is hard for me to trade on that. </span></span></div>
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<span style="background-color: white; color: #202020; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Many will point to the correlation between stocks and JPY. This correlation raced towards 1 when Abenomics took off in 2013. That correlation has broken down lately as optimism on the economy and foreign and domestic flows have led the Nikkei to outperform USD/JPY. </span></span></div>
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<span style="background-color: white; color: #202020; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="302" src="https://lh3.googleusercontent.com/VqQie8pqyZ8_pW9DAHM9OA2nbQ6ZJoJ1fDBnt_DTMNgbUdZYszPY_P0iRLotzlI2p9PIUBqpSqvom1_55Vvt0URtjjM_Pe7SBagtY0v611Dj8fCsA6QNlqUljMXNW8vOlHeYnpWe" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="462" /></span></span></div>
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<span style="background-color: white; color: #202020; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Will this relationship mean revert? I guess it could, one of two ways: 1) FTQ….stocks could take a big dump on any number of risk factors. The newly high-beta Nikkei cools off while USD/JPY grinds lower, or 2) Kuroda pulls out the Draghi card and says he’s still going to do “whatever it takes” to reinflate the economy, and the YCC target isn’t going anywhere. The former is a random variable (and positive for long JPY anyway)...the later is possible, I just don’t see it happening. </span></span></div>
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<span style="background-color: white; color: #202020; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">I think the market will eventually price an easing of the YCC policy more broadly than they do now. Importantly, the odds aren’t “even”...despite accelerating domestic growth, the yen is still the currency traders love to hate. </span></span></div>
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<span style="font-size: large;"><span style="background-color: white; color: #202020; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">That leads us to the technicals. </span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Locals are starting to reverse a long period of fleeing local markets in favor of foreign bonds...I can’t find a clean data set showing the history here but the potential repatriation inflow from domestic investors that have fled Japan in favor of foreign markets is massive. If this flow even tips towards balance, it would be hugely supportive for JPY. </span></span></div>
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<span style="background-color: white; color: #202020; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Moving to the dark art of CTFC FX spec positioning...despite signs of life across all sectors of the Japanese economy, the short yen position is at a multi-year extreme: </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="320" src="https://lh6.googleusercontent.com/315bEDFUCGrwLAnEtV0F9tn-6v5xrVOGHeZd9c82_zSgz_YlrODKwEuKNNt18dc08p2GZ-PhwlUMSwmJSDpzLFVz2LmMQ-4EXU2894eK5p7cW3ELpv8PAP0ufLRTjxeggO5r7Ijj" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="334" /></span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">And we remember from 2017 what can happen when the story “flips” in a currency with an extreme and structural short position: </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="249" src="https://lh5.googleusercontent.com/LFdR-HGAjALrcPOvcNtHE-WO28v8suz_paoknGf0h4WargFBjiBhGzJg8t0rtVeeAvsfUFqBTAGD-LmCypp822ngLEnk1mc-W9iIMrPFb_LgBVXXfUkJFIC8-mIINIqBadCkF-R5" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="383" /></span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Currencies are a zero-sum game (in DM, anyway)....but here the odds aren’t even. You’re getting good terms to take JPY risk here. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Lastly, there is the tailwind from the dollar and capital flows. </span></span><span style="font-family: "arial"; font-size: large; white-space: pre-wrap;">After the combination of dormant domestic demand, the Fukushima earthquake, and high oil and food prices crushed the current account early in this decade, the surplus is back, baby!</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Just as important, as the American consumer has picked up some speed, the US c/a deficit has started to turn lower again. Historical evidence suggests that the combination of a rising surplus in Japan and a deficit of 2.5% or higher in the US is a negative signal for the dollar. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="354" src="https://lh5.googleusercontent.com/tf6Kld2MTaceQsy8qwlF7Rs-2-kFiQEjND7xzRYykWmYsFPdMCVcouBdRmfcrNbeacZylIVQ5CvvgO344hN1fo4pGGVOaQJY1Q3eQ-1jSk5HtZorSI8xkGRDs7S47oemUfhln1lp" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="387" /></span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">And indeed, as I noted last week and IPA will be glad to tell us again, there is significant air beneath the dollar here, even after the poor performance in 2017. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="297" src="https://lh3.googleusercontent.com/Ei7sctJL9Ljol0MHSbhGGc25_tR1ywz_f3HMeaP5sGahQEZy-xZ1_krDt4iVffYCoWQknm447zNR653pnJIj6ugpgxuYfxzDSs0C-sTLVKmLIfgvjEzz3G1oVV0H_9ykSJQa0PVw" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="418" /></span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">And just as an aside, despite my misgivings last fall, I don’t see the structural support for an acceleration in inflation that will trigger a more aggressive hiking cycle, and subsequent USD appreciation--from the FOMC. Nor do I buy into the policy-driven growth renaissance in the US. The economic surprise index tells me there is more downside than upside there, too. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="357" src="https://lh5.googleusercontent.com/oQ5COK5FFr70a3wALqE9_vg0qoG91aPDYzGOab8dg5Ip97ztGwwQ7948BOIYy-09Qgq945fu960c9ET96FJGE8kfPOTRXSTxal9VEFVVXgQYqwOpcvy5_51mWGqhXNgME-MAFLB6" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Putting it all together as we like to say….cheap valuations, attractive positioning, strong fundamentals and potential for positive surprises from both sides of the trade (monetary in Japan, economic in the US) makes for an attractive risk-reward in buying yen. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">There it is. The first case I’ve ever made to buy yen. Deflector shields are down, blast away. </span></span></div>
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<span style="font-size: large;">Shawn</span><br />
<a href="mailto:TeamMacroMan@gmail.com"><span style="font-size: large;">TeamMacroMan2@gmail.com</span></a><br />
<a href="https://twitter.com/EMinflationista" target="_blank"><span style="font-size: large;">@EMInflationista</span></a></div>
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<br />EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com36tag:blogger.com,1999:blog-34323687.post-74523697007416535362018-01-02T15:44:00.001+00:002018-04-14T02:10:30.409+01:00Welcome to 2018....What's next for USD?<span id="docs-internal-guid-61c20c07-b899-b198-fb19-e4dfa5a5c514"><span style="font-size: large;"></span></span><br />
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<span id="docs-internal-guid-61c20c07-b899-b198-fb19-e4dfa5a5c514"><span style="font-size: large;"><span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;">The financial community returned today from its December slumber to whack the dollar. After finally posting a year of above expectations growth, and </span><span style="font-family: "arial"; font-style: italic; vertical-align: baseline; white-space: pre-wrap;">three </span><span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;">hikes from the FOMC, the currency is again the one the one traders love to hate. I don’t have a decent way to illustrate this, but I think it is fair to say short USD is a consensus trade going into the new year. </span></span></span></div>
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<span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;">Fundamentally, it makes sense. I believe we are seeing a phase of increased industrial activity after a LONG cycle of destocking and creative destruction of global excess capacity. As such, US manufacturing PMI has been moving higher consistently throughout the last year. </span></div>
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<span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"><img height="312" src="https://lh3.googleusercontent.com/2xyScMqcv7wGe70An7ss1UgzlYKZcqu4d4yLMIOpRBLh_aNs6bTFUlgfcPW5d6opcFtQfsjoh4bcbtL_rATERGrXv3ksMx8Ri-qtHmJubaLnGTPtkTsiKfgqK_58PLv8PnDi79LL" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="453" /></span><span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"> </span></div>
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<span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;">But that’s nothing compared to the resurgence in other advanced economies, which is a combination of the rebirth of growth in Europe--led by Germany, but far more evenly spread than any other time this decade--but also from Japan, where the economy is showing some signs of life that haven’t been seen in this trading lifetime. </span></div>
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<span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"><img height="337" src="https://lh5.googleusercontent.com/em3hM1PpC1vziJfipaY1wej1ZhhBpCmmSd5cxtW3VkPs4loSaeWYUpjM_jt-XTvGRgXsdpCMEgwOHfQi2nU2XceRIo8qELGduLmKInTZlwykHC_D1Nojt3XgwGDaP7a8LfMGRx66" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></div>
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<span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;">On valuation, despite the dollar’s poor 2017, it is still well above the 2013-2014 levels. This poorly formatted chart blends these two ideas together--the significant short position from spec accounts on the LHS, and the TWI on the RHS...Still plenty of space for traders to get paid here. </span></div>
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<span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"><img height="266" src="https://lh3.googleusercontent.com/NgZaLL5aup2458MOay2ITewVYGlpMrUmhmeGgd5umCBROizLLUz0K_RdExhzfLT-x5rtvvYsQrdpWOdjRZdTBhgQol6BQR6bOZZJ5pecouZlnUdeV0Io-wqSRt_nowdKBA0gF8_D" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="392" /></span></div>
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<span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;">Drilling into the technical data a little further--there is a significant dispersion in trading positions, despite the short USD bias. On a 3yr z-score, GBP and RUB are at significantly stretched long positions, while years of high rates and over-valuation has finally caught up to NZD. Similarly, AUD seems to be suffering from weak local data and some reluctance to bet on China keeping the machine cranking at full speed. </span></div>
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<span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"> </span></div>
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<span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"><img height="388" src="https://lh5.googleusercontent.com/FaeDFwPJ3yj3FdrJii8PH0p57wiceHWUuBPjZKLojdR8JUbrXt8NEQJuYaLGyG9s2SXp7_xbgeA_Dd0vgN5p74iOWZsW_F4A9qC1YTWc6ZNdVV0l2txNbinZEDiWR7eM1Ea00CGr" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="500" /></span></div>
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<span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;">(And I can’t help but notice BRL at a 3yr short extreme while MXN whistles along at the middle of the range, but we’ll save that for another post!)</span></div>
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<span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;">And then there is JPY. I’ve alluded to this before but really never got excited about it...the yen has confounded me for years because it is just so tough to get a clear shot on what to expect from the authorities there. Yeah, I get it...Abe and the BoJ are incentivized to let the yen stay cheap and keep the monetary petal to the medal. But that has a limit when recent performance looks like this. </span></div>
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<span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"><img height="280" src="https://lh5.googleusercontent.com/rD3ZAkRo2XqK5_DBqL4FzWdd8cXdZo7uFvHA0x5pZ6SDZPqOg4PsaOvwLvS3BD36E7NKOAyjTbIrZMvykFah7H9TOxFv7lLdiRY_vTmiOKDObgLG06kaVOpl6iURXKfvUqlpT3TK" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></div>
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<span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;">Combine that with the short position in the market and attractive risk-off dynamics...and yeah, long JPY makes some sense here, at least to converge with regional performance, if not for a more structural appreciation if the BoJ shows any signs of raising interest rate targeting or easing QE programs at large. </span></div>
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<span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;">For all the bearish views on the dollar, it is amazing that there is such a negative view of rates. Sure, the view on the dollar is driven by global growth, which presumably should lead to higher global interest rates. But the short view--if not positions--still seem largely confined to UST.</span></div>
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<span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"><img height="355" src="https://lh3.googleusercontent.com/CBwRjMXPh8OHUJ-AOxQvdQQFhdlz-f33VbuflBsQDt8-_1O9ws2fieqgxgzzRnVChGnvgTwOHIRFxfNd9nrlt5tv4iJtYevoe0mCkZ0GkXsYgALV2PCKQ1tK7MVKToiZG1BHRmTH" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="472" /></span></div>
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<span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;">That’s pretty amazing when you look at this chart...despite the move towards 2.5% last week there is still a reluctance to break out to higher yields...and vol continues to skulk around in the gutter. </span></div>
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<span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"><img height="280" src="https://lh5.googleusercontent.com/5yasQ2sD-AQHP0-TSfyV82iwzDeZ0Zo5fQT6R4Zmx4J39QCJHzpF-uVEUEhy5MXuhIxpkGIsLk6INSXSg4ZeAUXQRON778RcEbUj_J7Qcz3tUDQsBGkweurkVjHp19aiUDnIDGtZ" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></div>
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<span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;">Short positioning amid strong fundamentals and historically low vol….Someday, somewhere, someone is going to make money on a long vol position. I just don’t know when. </span></div>
<br /><a href="https://www.cfr.org/blog/chinas-impact-us-bond-market-gets-too-much-attention-and-europes-too-little" style="text-decoration-line: none;"><span style="color: #1155cc; font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;">Today’s post</span></a><span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"> by Brad Sester at Follow the Money had some good points on the relative importance of Chinese flows and European flows into the US bond market, which brilliantly ties these two markets together. More on that later in the week. </span></span></span><br />
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<span style="font-size: large;">Shawn</span></div>
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<a href="mailto:TeamMacroMan@gmail.com"><span style="font-size: large;">TeamMacroMan2@gmail.com</span></a></div>
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<span style="font-size: large;"><a href="https://twitter.com/EMinflationista" target="_blank">@EMInflationista</a></span></div>
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EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com25tag:blogger.com,1999:blog-34323687.post-26041907482191440792017-12-27T05:35:00.001+00:002018-04-14T02:10:15.977+01:00TMM Christmas Vacation: The Greatest Laker<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="351" src="https://lh6.googleusercontent.com/T_xCPwqOI9kFhAOVidUy6AkXgytOEiEWgf1QbXpS0VZmFfYrwq4TuNnXutIjVbhpR-4tX68GKLwj8tZlN0ZDKVH5PBbzc4VmviDEBqGqfXvFYkO9cdCAHRSuxU3nKaVrRX4pUOeL" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></span></div>
<b id="docs-internal-guid-0480259d-9676-cd67-a525-45b39246f8be" style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Christmas wishes to one and all in Macro Man World...I trust anyone on the trading desk this week falls into one of a few categories: 1) junior guys left behind to helm the ship, 2) senior guys that generate a few extra bucks picking off the weak members of the holiday-trading herd, 3) those that figure this is a good time to clean out inboxes, tidy up excel models, or otherwise clear the decks for a clean start in 2018. </span></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">As such, there isn’t much going on...and since I not the type of poet that can summarize the year’s economic events in the poetic pentameter of </span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">T’was the Night Before Christmas</span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">, I’m going to put my spin on the tradition of a seasonal digression from macro events.</span></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">I’m going to talk basketball, philosophy, leadership, and life. </span></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Shortly before Christmas, I took my six-year-old daughter to a birthday party at a friend’s house. I had never met the family before, and after introductions we walked downstairs to the basement where the girls were watching a movie. At the bottom of the steps was a beautifully framed Magic Johnson jersey. </span></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">“Magic….nice!” I said. </span></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">“The best of all time,” my host exclaimed. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">“I agree,” I responded, “but did you hear what he said at Kobe’s number retirement? He said Kobe is the greatest Laker ever.” </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">“He had to say that,” he said. </span></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">“Sure, I guess that’s true,” I said, just to wrap up the conversation. But later in the day it got me thinking. Who really is the greatest Laker of all time?</span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">With all due respect to Jerry West, who I am too young to have ever seen, and Wilt Chamberlain, who only played five seasons with the Lakers before retiring, there are only three names in the conversation: Magic, Kobe, and Kareem Abdul-Jabbar. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">I think a lot of people overlook Kareem. Kareem was a supernatural force on both sides of the court. He had the size, touch and skills that had never been seen before in a big man. While he won the MVP award in Magic’s rookie 1979-80 season, Magic’s versatility, charisma and charm overshadowed Kareem’s effective but taciturn efficiency. Magic was the guy everyone wanted to be like, a natural and undisputed leader. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Unlike Shaq and Kobe, Kareem and Magic made it work. The Lakers went to the finals eight times in ten seasons, winning five. And that was during a time when the Celtics were putting out some all time great teams as well. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">It is tough to evaluate Magic and Kareem separately. An all time great point guard and dominant presence under the basket was a combination very few in the league could deal with. They were more than the sum of their parts.</span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">And then there’s Kobe. If there was ever a player that defined the term “shooting guard,” It was Kobe. Where Magic averaged 11.2 assists per game, Kobe averaged 4.7. Indeed, Kobe averaged an insane 25 points per game for his career, which is 12th all time. His playoff record is similar to that of Magic and Kareem, winning five titles. Of the three, Kobe was the one you’d want on the team if you were down ten in the fourth quarter. While Magic might be able to rally the troops, Kobe could simply take over and make basket after basket while the defense watched helplessly. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">If you’re into advanced stats, the folks at basketball-reference.com calculate “value over replacement player” which seeks to aggregate various stats into one objective number. Kareem comes out on top at #7 compared to #12 for Magic and #17 for Kobe. But this probably owes as much to Kareem’s longevity (and non-Laker history) as anything else. If you take out Kareem’s time with the Milwaukee Bucks, he slides in at #18 right behind Kobe. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="497" src="https://lh5.googleusercontent.com/c51QZmPGoIxW8gzOoMWpnVaEb7QuFff0F3ECU9nxY6IcQvBhWtJWzB15XTohZZNbxbs1q3nvBJGXKQT4Df2T6az34wGmX-mfpRuze7CwuIwWw51Z7mQ9bH944PfTshBVGhihSQi7" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="265" /></span></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">There is also something called “Player Efficiency Rating” which seeks to normalize total performance and minutes played. Here again we see Kareem and Magic running basically even, one order of magnitude ahead of Kobe. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="581" src="https://lh5.googleusercontent.com/Pp43h-mmxgE5615OpoOY7VTTzrdNjDYrc1FxZA83leMOjIkkWHlNtid03z9RgyKpykzarANAIZoM0K7lifXUIDAAeIV37zCDrVam9VtJjq9jk1uAUe8UA1hqMJQzVw4idwRKsQtQ" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="235" /></span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Then there is the one place where Kareem crushes everyone. Acting. Best athlete movie cameo ever.</span></span></div>
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<iframe allowfullscreen="" class="YOUTUBE-iframe-video" data-thumbnail-src="https://i.ytimg.com/vi/ArHNrCvwq4c/0.jpg" frameborder="0" height="266" src="https://www.youtube.com/embed/ArHNrCvwq4c?feature=player_embedded" width="320"></iframe></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Taken all together, I agree with the party’s host...the greatest Laker award has to go Magic. The Showtime Lakers are clearly ahead of Kobe….but with a few of Kareem’s best years being in Milwaukee, and Magic’s role dishing the ball to the big man for dunk after skyhook throughout the 80s, it clear that none of it would have been possible without him. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">But I keep coming back to his response to Magic saying Kobe was the greatest Laker of all time. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">“He had to say that.” </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Well, no...he didn’t. Magic said that because he’s Magic. He said that because one of his greatest attributes was humility. Magic understands that the team is capable of more when leadership involves everyone….even Kurt Rambis. Magic not only has incredible court vision, unrivaled ball skills and the ability to play every position, he understands people. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Does it hurt Magic to say Kobe is the greatest of all time? No. Was it the right thing to say at a ceremony in Kobe’s honor? Absolutely. It was gracious, kind, and 100% Magic. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">That personal touch has translated into a successful business career since Magic retired, once he realized coaching and late night tv wasn’t his gig. Just as he did on the court, Magic the businessman has the skills to identify opportunities, build a team, and then inspire people to follow him. </span></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Magic is what you want in a boss. He’s brilliant. He has vision. He’s a genuine leader, not prone to give you a line of bull just to get you to do what he wants. He has a demonstrated history of making people around him better, and when success comes, he gives credit to those around him rather than seeking it for himself. Even today, </span><a href="https://twitter.com/MagicJohnson?ref_src=twsrc%5Egoogle%7Ctwcamp%5Eserp%7Ctwgr%5Eauthor" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">his twitter feed</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> is stocked full of shout-outs to both stars and role players that played well the night before. If you can join a company with that kind of leadership, you’re going to be happier at work, happier in life, and in the long-run, probably more successful too. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Compare that to the “people skills” Kobe showed during his playing career. The guy had a singular focus: winning. If you weren’t bringing it 100% all the time, he would destroy you. He didn’t suffer fools, and didn’t share the spotlight. If you were on board with that, you could go along for the ride, perhaps to great success. If you weren’t, well, </span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">hasta la vista</span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">. Fans love that kind of devotion, but it’s a dark, brutal work culture. The odds of Kobe turning into a successful and inspirational business leader are long, to say the least. </span></span></div>
<b style="font-weight: normal;"><span style="font-size: large;"><br /></span></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">This type of personality is custom made for the hedge fund industry. This business attracts them like moths to a flame. In fact, I think hedge fund investors look for this type of personality profile….one that is nearly psychotic in its pursuit for alpha. I’m sure everyone reading this in the financial industry can think of more than one person that reminds them of Kobe.</span></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">With any luck, you’ve had the fortune to work with a Magic as well. </span></span><br />
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><br /></span></span>
<span style="font-size: large;">Shawn</span><br />
<a href="mailto:TeamMacroMan@gmail.com"><span style="font-size: large;">TeamMacroMan2@gmail.com</span></a><br />
<span style="color: black; font-family: "arial"; font-variant-east-asian: normal; font-variant-numeric: normal; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"></span></span><br />
<span style="font-size: large;"><a href="https://twitter.com/EMinflationista" target="_blank">@EMInflationista</a></span><br />
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EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com72tag:blogger.com,1999:blog-34323687.post-72479207595867646522017-12-22T04:32:00.002+00:002018-04-14T02:09:52.766+01:00Cryptos and the Fixed Income Selloff<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">So I wrote about cryptocurrencies back in September when it seemed clear that we were in the midst of a bubble. I guess I should have relayed what Soros says about bubbles. "When I see a bubble, I buy it." Now that </span><a href="https://www.bloomberg.com/news/articles/2017-12-21/goldman-is-said-to-be-building-a-cryptocurrency-trading-desk" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Goldman Sachs is setting up a cryptocurrency trading desk</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">, it is worth revisiting the topic. If the squid is setting up a desk, it means their customers are asking for it, and of course, because they think they can make a buck there. How will they do it? Will they launch a facility to borrow and lend? The GS crypto-repo desk? </span></span></div>
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<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Looking back, how does </span><a href="http://macro-man.blogspot.com/2017/09/bitcoin-is-it-currency-or-something-else.html" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">my piece on bitcoin from September </span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">hold up three months and many billions of dollars later? I carried on for a while about how it doesn't look or act like a real currency. That's more even more true now than it was then. The volatility and appreciation in these "currencies" has wiped out any advantage for a seller to accept them as payment, even for pirates and drug lords. Are they really more like equities? That's what I have been told about ripple and etherium. Sure, ok...I actually understand the ripple business model but I don't see how it translates into buying their coins, or tokens or whatever they are. But I get it from a certain bubblicious standpoint. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Yet there are still millions, if not billions of people in this world that live in (or have recent memories of) autocratic regimes that have a habit of seizing control of the monetary system to serve their own purposes. That's the core market here, and one that people in the US and (western) Europe don't quite understand. So good luck crypto-traders and Goldman...I'm sure you're on the vanguard of a monetary revolution that finally takes back the monetary system from the rich and powerful. </span></span></div>
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<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">It is worth remembering that the</span><a href="https://coinmarketcap.com/charts/" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;"> total increase in crypto/coin/token market cap in 2017 is roughly $500bn.</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="247" src="https://lh5.googleusercontent.com/aX5OU8GAHV5LwIjDY7nYKK1ldyWa34dnJvs55e2pa7S6IVuUoXSMd6r45A5BvDNpzGr1pd-KresHlfaJ6JZAz9lbx9L9qIZyuht5FGekJInQrJBk965C_yoM8SwF4eaKWcR2IsDT" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Source: Coinmarketcap.com</span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">And the sum of global equity mutual fund and ETF inflows? $411bn through November 29. While that market cap increase doesn't represent a dollar-for-dollar inflow, just stop and think about those numbers before you write this trend off completely. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="350" src="https://lh5.googleusercontent.com/QWbFpHwpEUh1riZXxscsW0MuNt2VL3LXnjbwGLMOKIEFzuO48FA3Yr9mE3B7aTfeumud_zJdGImULE_R_ou3RNKGTO3YrqwwzrovKIQ2F7oGYqMIvBmqNSQ63YrMP57n0FTEHUzl" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="438" /></span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">In other news...are bond yields finally starting to break down? </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="247" src="https://lh3.googleusercontent.com/XDGLKFZPYkmlOtjdRs5ajdzrdW7kR-z-YBoQF_Mv3XVGRiwy_jueKqqDdkFIo1m6B2K_FF0bBeQiS745iMS9YSqj5a4MpHkprA3u4Y2TjdNhvqIUKkcF5JUMuqufOng70GvJL9M1" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Well….doesn’t look like it to me...I was on the record saying there had to be a large buyer of long end UST, especially in TIPS, throughout most of November and early December. Looks like that is cleaned up here and bond yields are getting sucked higher as one would have expected given the moves in underlying fundamentals and the advancement, and eventual passage of the US tax reform package. And sorry to point this out, but there were more than one commentor (and trader) out there arguing that Trump could never pull off a tax reform after stumbling from one political disaster to another for most of 2017. Yet here we are. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">As for the long bond….call me when we break 3%. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">That’s going to put a wrap on Team Macro Man until after Christmas...I’ll be in front of a laptop all next week so I should have the chance to go a little deeper on the above topics and potential 2018 risk events. I wish I was talented enough to rhyme “Twas a Night Before Christmas” into a summary of 2017 macro events...if you are...I beg of you, please send it to me at the TMM2 address. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">With that, Merry Christmas! </span></span></div>
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<span style="font-size: large;">Shawn</span><br />
<a href="mailto:TeamMacroMan@gmail.com"><span style="font-size: large;">TeamMacroMan2@gmail.com</span></a><br />
<a href="https://twitter.com/EMinflationista" target="_blank"><span style="font-size: large;">@EMInflationista</span></a></div>
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<br />EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com5tag:blogger.com,1999:blog-34323687.post-66375792139416960072017-12-19T16:52:00.002+00:002017-12-19T16:52:36.394+00:00"Blast-off" or "As good as it gets"<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjMNCNNeyyj6BQ9bVUnLw-5Asu1t5Zf5P4oKDZTmGH3j2Zp2xwtsQYqCWHqs6AfRkMJFruAf5h07sNALpyLDWrpRCov8zm_z2_XQN_BlVYJRm6UNaGAXhyuLO8Z_t0hckmO2dUjCg/s1600/Spx-F9-Landing-Burn.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="937" data-original-width="1500" height="199" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjMNCNNeyyj6BQ9bVUnLw-5Asu1t5Zf5P4oKDZTmGH3j2Zp2xwtsQYqCWHqs6AfRkMJFruAf5h07sNALpyLDWrpRCov8zm_z2_XQN_BlVYJRm6UNaGAXhyuLO8Z_t0hckmO2dUjCg/s320/Spx-F9-Landing-Burn.jpg" width="320" /></a></div>
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2017 has been a rocket ship type of year, from Bitcoin to FAANG to High Yield, to EM FX, pretty much everything has done well. Even the Deflationists have had a decent year as long they weren't in the front end. The question for 2018 though is can we expect it to continue</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjPiRfVEP4jehv7IklRC7lbOcl2iJnnKDIgbwClWBTtsA2twJdiOouX23JPtqSZQTpZp00XJOpLvdYWHMhtEKsCC9Bg3yjOmictx2HVbjMuXlAXq0Hjat2XphVTa5MABbBNnd3JDA/s1600/asgoodasitgets.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="611" data-original-width="489" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjPiRfVEP4jehv7IklRC7lbOcl2iJnnKDIgbwClWBTtsA2twJdiOouX23JPtqSZQTpZp00XJOpLvdYWHMhtEKsCC9Bg3yjOmictx2HVbjMuXlAXq0Hjat2XphVTa5MABbBNnd3JDA/s320/asgoodasitgets.PNG" width="256" /></a></div>
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To be fair, your author was writing a similar post early in 2017 arguing that this was probably close the the top in economic growth as proxied by the ISM. Clearly I was wrong, so take the rest of this post for what is worth. </div>
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1) Spreads. Take a look at HY and BBB spreads. </div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiHb_dFqKl0Ou9_3FaAysRrAHpE5oo2om0VfJxfEMVg-z-y7VKZyg4UaVk0Qf7NMwtxceN0paM50tKWshAeoHoiiwYIoE-lYQqnQdK4QAa7gl40ZhTOYGBAmnbVpz5-9_8wh7LGjg/s1600/cdx-hy-12.19.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="784" data-original-width="1272" height="246" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiHb_dFqKl0Ou9_3FaAysRrAHpE5oo2om0VfJxfEMVg-z-y7VKZyg4UaVk0Qf7NMwtxceN0paM50tKWshAeoHoiiwYIoE-lYQqnQdK4QAa7gl40ZhTOYGBAmnbVpz5-9_8wh7LGjg/s400/cdx-hy-12.19.png" width="400" /></a></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjCUG2g4qJCN5kormPDjMS2gOuUCdM2liOjcitM13ZWKKgsDkn0hc-VDr2aYBbSbiXBOvZNc4C8B9aH_OeUOiOYp8p_WeXXNhpuuV1pUt4-v4uKygPj464toaclBn5T0cNOSUgmwg/s1600/bbbspread-12.19.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="793" data-original-width="1274" height="248" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjCUG2g4qJCN5kormPDjMS2gOuUCdM2liOjcitM13ZWKKgsDkn0hc-VDr2aYBbSbiXBOvZNc4C8B9aH_OeUOiOYp8p_WeXXNhpuuV1pUt4-v4uKygPj464toaclBn5T0cNOSUgmwg/s400/bbbspread-12.19.png" width="400" /></a></div>
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While not outright bearish as there is room for more compression, we are clearly near the expensive part of the range. And of course it makes sense, corporate profits are killing it. But under the hood, a lot of CCC and B bonds are not doing well. Retail, telecom and parts of health care are all under performing. </div>
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I took all the issuers in the HYG and split them up by ratings, and made an equally weighted equity portfolio for each. You can see HYG - B issuer's stock prices have been ugly. Not a good sign for the bonds going forward. While bond guys might be the smartest, individual names are usually best left to the equity jocks, IMO, until they get to distressed levels. </div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEif6Ch-WHPcZ1tgcoCKDRfA3YpnnI6ljKnNpy43y1xn3jYXBMzDN5FhRl8NYDQ1URWlXMz5xhXT5_C8N_livU9bz8NPCUcH47JcYn2VqFjJmRqOpT8Sz0NP1tjk0Ljxtv41eqDmmQ/s1600/b-equities-12.19.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="790" data-original-width="835" height="377" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEif6Ch-WHPcZ1tgcoCKDRfA3YpnnI6ljKnNpy43y1xn3jYXBMzDN5FhRl8NYDQ1URWlXMz5xhXT5_C8N_livU9bz8NPCUcH47JcYn2VqFjJmRqOpT8Sz0NP1tjk0Ljxtv41eqDmmQ/s400/b-equities-12.19.png" width="400" /></a></div>
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Whereas the BB issuers have doing a quite a bit better and trading more or less in line with HYG but under-performing the Russell 2000 (though there are some different sector weightings so not sure Russell is the best benchmark)</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEigwCGLbe4JGGN45s9ygZeF_cfnpR-fUAlDG2D0IptjsYvcQc2Q2NNFKiHv-AI6zsgPfBOydgYMTBWvn7UgtuFDt8UuTveF4CjCJDwf_m-dQUpH2BpZrUI3CWZcsBIRCexoQNVdpQ/s1600/bb-equities-12.19.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="788" data-original-width="839" height="375" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEigwCGLbe4JGGN45s9ygZeF_cfnpR-fUAlDG2D0IptjsYvcQc2Q2NNFKiHv-AI6zsgPfBOydgYMTBWvn7UgtuFDt8UuTveF4CjCJDwf_m-dQUpH2BpZrUI3CWZcsBIRCexoQNVdpQ/s400/bb-equities-12.19.png" width="400" /></a></div>
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Flag number # 2, corporate earnings have been rising due to synchronized global growth. And while the multiple has expanded, when you have rising earnings, its the fuel to the equity rally. This is an earnings driven market IMO. Figure out where earnings are going, first, and then prices follow</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi66UtjOYIPEppAg_3oc6YMpZUdkNe9Xc4bL4dvPKn5X3dlQUwbdyIMl3xw16HgNA8K9xS7H6Z9LPhuahu5dRhLtA6iDt6zDcUNyB1buMLMz91ccR1hbVCGYYgXe1KT65GbG7lwrg/s1600/spx+earnings.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="431" data-original-width="691" height="248" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi66UtjOYIPEppAg_3oc6YMpZUdkNe9Xc4bL4dvPKn5X3dlQUwbdyIMl3xw16HgNA8K9xS7H6Z9LPhuahu5dRhLtA6iDt6zDcUNyB1buMLMz91ccR1hbVCGYYgXe1KT65GbG7lwrg/s400/spx+earnings.PNG" width="400" /></a></div>
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You can see the 2017 synchronous global growth story show up a lot of measures, including economic surprises, global PMI, commodity prices, EM FX, earnings revisions and others. But we are pretty much at peak levels for most</div>
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For me, the elephant in the room is China. We know they are slowing heavy fixed asset investment and trying to reign in the housing market in Tier 1 and 2 cities. Supply side reforms are for real and they are having the intended effect of boosting corporate profits. In addition, a tight labor market with wage increases is helping consumer spending and the dynamic transition towards internet businesses. Clearly BABA, Tencent, JD, Weibo and others are doing something right and the Chinese consumer is healthy. But its the industrial and manufacturing sectors that are the cyclical ones to watch, in particular exports. And for 2018, I'm sticking with my guns and assuming China slows down, particularly after Q1. </div>
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Where I could be wrong is if global growth keeps on chugging along at high levels which spurs capital spending. While the US tax reform is a good reason for companies to open up the check book, I'll wait to see the evidence. But it is possible we see a pickup in global capital spending, particularly since its been so depressed in areas like the EU for the past several years. Consumer and CEO confidence is high, so this is something to watch.<br />
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Happy Holidaysabee crombiehttp://www.blogger.com/profile/13320039155613443039noreply@blogger.com13tag:blogger.com,1999:blog-34323687.post-88520012739250909632017-12-13T04:43:00.001+00:002018-04-14T02:09:38.088+01:00Forget about the FOMC...Let's Talk Banxico <div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Today (or yesterday, by the time most of you read this) is the feast day of Our Lady of Guadalupe. It marks the day in 1531 when the apparition of the Virgin Mary appeared before Saint Juan Diego on a mountain outside of what became Mexico City, and led to the conversation of much of the indigenous population to the Catholic faith. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">This is a foundational event in Mexican cultural history, which is why I love this picture--dozens of young people (and a scrawny stray dog) carrying her image outside of the basilica. This parade--which is replicated throughout the country on this day--is a labor of love, honor, and devotion with just a touch of patriotism. If you’ve never been in Mexico on December 12th, check it out. It’s Christmas and Independence Day rolled into one. You’ll never forget it. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">In honor of this great holiday, let’s take a look the upcoming rate-setting decision by Banxico on Thursday. Unlike the FOMC, which hasn’t surprised anyone with a rate change decision in going on a decade, this one is a toss up. The market is pricing a roughly 70% probability of a 25bp hike after higher than expected inflation prints in October and November and a coincident depreciation of the peso. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">I think they are going to stay put at 7%. Here’s why. </span></span><br />
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<span style="font-family: "arial"; font-size: large; white-space: pre-wrap;">1) Growth is stagnant, at best. While there is some drag from the earthquakes in the Q3 numbers, the economy isn’t hitting it out of the park by any stretch of the imagination. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="336" src="https://lh6.googleusercontent.com/lbIdmm-Ifr1MOH5NbCbIRO6IxePvKQMZC3f0qmMCof4dZOwOvy_-R1ZnBnjf6vli7J4YhbOvrqFH7wFfGaDdl1jx8LBmd66fE18JRz0gKPMSjJYNDpX8rcJKRm4cU6h3ABTJSHR7" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="382" /></span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">One of the main reasons for that is the ongoing tightening of fiscal policy by the government and poor business confidence, which has led to a decrease in private investment as well. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">The combination of the above investment drawdown, Trump-phobia and Banxico’s 400bp hiking cycle has hit the consumer hard too--household and housing credit growth rates are falling significantly. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="474" src="https://lh3.googleusercontent.com/YCynRYixRCZmVAcaquO31iGwqK12PPH672Dv1wC_2wTE91-NYcgZ_4gj1gucrIv0lCxDtkWJK2Gk4Ac40S81FZ1AxejyWCdiaBtLdupt8eTJCQ6nXkXu-pOwWNXgBAYgSy9kFXJk" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="490" /></span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Which has also caused a slowdown in retail sales, and hit the bottom line for retailers.</span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="330" src="https://lh6.googleusercontent.com/YauY7bNtPp5DyhvkZZYpuTB20r0v44nSw8itrXoeknJYH8fp2nYkwSD-Ss5yFDwyiY_lV-HYqfg1ddFnVI_JHIBd6rzBk796zmaFTKnlK6AxTX2e9aOkGoK3Z7YxKCO-gM7KHjWx" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="310" /></span></span></div>
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<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">That equity rally you’ve been hearing so much about? </span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: italic; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">No habla español. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="392" src="https://lh5.googleusercontent.com/mIT9jk2O57AzD89yqt7Wmi7eYWomh2kEJ09GLuThdttOST0hLLIkQNZOxLxUvV4vxjBNfgW3SamZmKeWfHGFuzr62vUKqtsXotCnzztfStBy9lLvjljWrmBqWQLpnTdEOD99mjOA" style="border: none; transform: rotate(0rad);" width="624" /></span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Taken together, this negative view on growth has led the central bank to forecast a slowdown leading to a persistent negative output gap well into the future.</span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="480" src="https://lh4.googleusercontent.com/_IVLR1UrkI1KUfzdGRKuvRBqxHNVz6Td7HGbJmEx6xMXbWDa34AZUUeSOtSaVgHszicw15ZRSLEbVtwBj8MOQPHMtpmrTBJVXSNefZbqlkyLudmccH97ab63bjNVFS2c1TftEcf4" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="496" /></span></span></div>
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<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-tab-span" style="white-space: pre;"> </span></span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">2) Inflation: those calling for a hike rightly point out that inflation has been surprising on the upside--this camp claims Banxico must act to stabilize inflation expectations before they get out of hand. This argument ignores the underlying drivers of inflation that 1) have been impacted by one-off effects and price changes, and 2) with the exception of propane prices, have leveled off since the price shocks early this year. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Headline inflation is indeed still over 6% and has yet to start falling significantly as the central bank predicted during the summer….but this is largely due to a huge increase in propane prices. Similarly, contrary to what many sell-side analysts reported, higher than expected inflation figures over the past couple of months were not due to pass-through effects from the depreciation of the peso, but instead from a modest seasonal increase in retail prices across the board, not one isolated to larger increases in the prices of imported goods. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">More importantly, underlying inflation gauges have indeed stabilized--core, trimmed mean and median inflation levels have been stable for months, and will soon start to decrease as the base effects from the price shocks of early 2017 roll off.</span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="274" src="https://lh5.googleusercontent.com/eWUmM9s2NpbRX-J2LfmmQCTXtnl7RA90tzaSdQiNceGgpeNYCyWJTrgP4GA9lhy3cJnmLpJ1UYaQJ2PLZvRj6-CJrDFQMiU1vzZbNseBAojoXDYf-lYMxDZgMZoNKB6ptC3-k_Eg" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="473" /></span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">High frequency data also points to a stabilization of price increases--the right hand column of this chart shows the 3m/3m annualized inflation figures...core is 3.57%, as is services...a number that is skewed higher by a seasonal increase in education prices. These figures are well in line with historical norms. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="137" src="https://lh3.googleusercontent.com/_xUHHtch1CVupuxhACOYEApZuMXiLYCmqDX_p9n7qFSCnb-OSfIMBfGjAxEdWW2Y6-RFsGj5zTi1RFF4kT5jkZaM3kCWh6rShjjHNuxfvs-4-M-afrcEzvfqfa82f81Oww6c_lNN" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="499" /></span></span></div>
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<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-tab-span" style="white-space: pre;"> </span></span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">3) Rates are already high. Given the deteriorating consumption, investment and growth figures, there is good evidence the current level of rates is already stifling economic activity. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;"><img height="297" src="https://lh3.googleusercontent.com/CM5e5DtP-02Zq7qZr7NMLLOdmvM4wvlMJTEssmm0Ma5bgnf3r0ysf9EZfC60BWoKK87i8v9zLiWGPJoZuQiQE_8BsPUX6XOG_vMAtoqpSWOV8N-jncSByql-qFWsB-MyCh03tGob" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></span></div>
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<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-tab-span" style="white-space: pre;"> </span></span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">4) Which leaves us with the peso...has the selloff in MXN really been that big? </span></span><span style="font-family: "arial"; font-size: large; white-space: pre-wrap;">It’s off 5% over the last six months...in the bottom tier for EMFX over that span but far from a game-changer for monetary policy...especially when you got back around 3% of that in carry. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">I like to err on the hawkish side in orthodox EM monetary policy debates because so often the question comes back to financial stability and volatility. But in this case the central bank has already done the heavy lifting, and another 25bps is going to do more to hurt domestic investment than it is going to stabilize the currency, which is going to bounce around like a pinball in 2018 as NAFTA and the presidential election take the center stage--there's little Banxico can do to change that. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">Does the selloff in front end US rates and the steepening eurodollar curve change any of that? It should...eventually--if the Fed persists or accelerates hikes next year and causes a big strengthening of USD vs. EMFX. That continues to look unlikely after today's low US core inflation print, so there's no pressing need for Banxico to react in kind to the Fed's hike. Regardless, I think Banxico has done enough already to buy itself some time in 2018 when the bank's forecasts of lower growth and inflation will come into focus. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">What about the Alejandro Diaz de Leon, the new boss at Banxico? Some say he’ll want to come out swinging with a hike to prove he’s a tough guy. Banxico doesn’t operate that way. They’re smart, data-driven, and painstakingly independent. They’re no more likely to be pushed into a hike now than they are to be pushed into doing PRI a monetary favor before next year’s election. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: large;">A weakening economy, cratering credit growth, high ex-ante real rates, and stable (and soon to fall) inflation...Doesn’t add up to a hike! </span></span><br />
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<span style="font-size: large;">Shawn</span><br />
<a href="mailto:TeamMacroMan@gmail.com"><span style="font-size: large;">TeamMacroMan2@gmail.com</span></a><br />
<a href="https://twitter.com/EMinflationista" target="_blank"><span style="font-size: large;">@EMInflationista</span></a></div>
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<br />EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com10tag:blogger.com,1999:blog-34323687.post-59241948856768178042017-12-12T04:05:00.000+00:002018-04-14T02:09:13.082+01:00Here It Is...Team Macro Man's 2018 Top Trades<span style="font-family: "georgia" , "times new roman" , serif; font-size: large;"><br /><br /><img height="345" src="https://lh3.googleusercontent.com/hVJWIBwPnNyIJ_5tieAGHpw0cZsBQ_cp1i7JOUq3YyGfVpcjlOpk_DX34v2LFbw7bne3n7LbtehbWwX8_HDRxxXCN6ANt5bhxRgX8K1qoR01ys3AEpmEYlNhHKsf76a9XEGe6gzU" width="640" /><br /><br />Here it is folks, the 1st annual Team Macro Man Top Trade Ideas for 2018. <br /><br />I love the diversity in the ideas here. Nobody jumped on the short 10y UST bandwagon with Goldman and Apollo….and nobody joined the quant folks at JP Morgan in suggesting trades that are a great conversation starters with the ladies at the Columbia University physics department holiday party. <br /><br />In fact, the ideas are so diverse it is tough to pick out any common themes, but that shouldn’t be too surprising when the most dominant theme of 2017 was probably “low vol”. Another dominant global theme this year has been “synchronized global growth,” which is now leading many strategists to predict widespread monetary tightening in 2018. <br /><br />The “morning in Europe” and, I’ll add myself, the potential “morning in Japan” themes could be big game changers in 2018. Wages and inflation haven’t picked up much, but if they do, there is more to go for asset markets, FX and rates in both regions. Lastly in the US, despite what I have written here about inflation and curve-flatness, I have a tough time envisioning a increased pace of tightening by the Fed that would cause a significant strengthening of USD, which points to more of the same next year--risk on, flattening, low vol. Equity markets may have gotten a bit ahead of themselves with the tax reform rally, but that will be a distant memory by next December. <br /><br />This type of “forecasting” begs to be shown up in short order because we simply don’t have a crystal ball that tells us what surprises the world will throw at us in the next twelve months. But what we really want to get at here is not so much the trades but the themes--what will be the game-changers? What is the market not expecting? Keep that in mind before opening the bomb bay doors in the comment section. <br /><br />With that, take it away TMM! <br /><b><br />TMM #1: Short JPY vs. g10 basket</b><br />Long term solution for Japanese debt given growth outlook (it will go up but 10% real ain't likely) is to run inflation hot. Near term global growth picking up and hence global neutral rates going up. Locally growth picking up. BOJ will not move short rates. They might let the curve go. Rates differentials, inflation, deficit and lack of other solutions means they likely let the currency go.<br /><br /><b>TMM #2: Buy IBov/EWZ vol</b><br />I like Ibov (and EWZ) for 2018 but think the vol, is very low in historical terms, specially for a election year. <br /><br /><b>TMM #3: Receive 2y China Rates</b><br />There’s no doubt the deleveraging effort is sincere, and no doubt that the debt burden will go up if they force corporates and SOE’s to refinance at higher rates. If the government want a lower debt burden, they need to pull rates down and clamp down on lending. By phasing out guaranteed wealth management products, they drive savers into the arms of government bonds. Buy 2y CGB’s if onshore – rec 2y NDIRS if not. Enter Target 2.75% 2y yields. Stop at 4.50%.<br /><br /><b>TMM #4: Long GE, ATM covered writes (with roll-up) </b><br />In the eventuality it rallies...much. Dividend IS covered and jumping on any premium should be better than best Utility trade.</span><br />
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<span style="font-family: "georgia" , "times new roman" , serif; font-size: large;"><b>TMM #5: Short all manner of Aussie coal/housing retail </b>with ratio spreads or credit spreads. Not looking for BIG payoff, but "safe" payoff. <br /><br /><b>TMM #6: Short EUR </b>better late than never. ;)<br /><br /><b>TMM #7: Buy Uranium (URA) </b>Two dominant suppliers co-ordinating major supply cuts to help balance the market, with the Cameco CEO of literally saying “<a href="http://thestarphoenix.com/news/local-news/cameco-to-suspend-uranium-production-at-two-sites-845-jobs-to-be-cut">we can actually buy uranium cheaper than we can produce it.</a>” The industry which has been battered since the 2011 peak (URA was down 80-90% at its bottom) and the cuts were timed just before the 2018-2020 bulge in the long-term utility contract rolls. Chance for a huge sentiment change with investors, especially if the hereto disciplined utilities that have (rightly) been waiting to renew contracts worry about the market being under-supplied and race each other to renew their contracts. (see 2006-07 for the last time that happened).<br /><br /><b>TMM #8: Buy Greece (GREK) or Greek Banks (ALBKY/etc) </b>Everyone's been burned and the French solved the IMF/German impasse - <a href="https://www.nytimes.com/2017/06/15/business/eu-greece-debt.html">“The Eurogroup formally agreed to a longer-term French plan to link the scale of Greek bond repayments to the country’s economic growth…</a>”. This means a bunch of catalysts - banks passing stress tests, exiting the bailout, issuing debt in the public markets, maybe even an Syriza loss in an election - for a country (GDP fell by more than US great depression) and market that's looked at as dead.<br /><br /><b>TMM #9: Buy Argentina Equities</b><br />Team Macri, baby! If Macri is Reagan, and Sturzenegger is Volker, where are Argentinean equity prices going? What about Real Estate and Private Equity?<br /><br /><b>TMM #10: Short TSLA</b></span><br />
<span style="font-family: "georgia" , "times new roman" , serif; font-size: large;"><b><br />TMM #11: Short S&P</b>“A Brisk Trip back to 1854” <i>(quick, to the point...I like it. --ed)</i><br /><br /><b>TMM #12: buy XOP </b>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. <br /><br />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.<br /><br /><b>TMM #13: Short Gold/short USD/JPY spread trade</b></span><br />
<span style="font-family: "georgia" , "times new roman" , serif; font-size: large;"><b></b><br /><b>TMM #14: Buy EURCHF</b>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.. <br /><br /><b>TMM #15: Sell MXN, buy a basket of high yield EMFX: ARS, BRL, RUB </b>Political risk, NAFTA risk, energy prices and high real rates conspire to further subdue investment, consumption and growth in Mexico, while positive local dynamics, strong macro trends and flat-to-higher oil prices support the high-yielders.<br /><b><br /></b></span></div>
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<span style="font-family: "georgia" , "times new roman" , serif; font-size: large;"><b>TMM #16: long USDTWD (or SGD)</b>Betting on slower global growth, particularly in China</span><br />
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<span style="font-family: "georgia" , "times new roman" , serif;"><span style="font-size: large;"><b>TMM #17: Long USD/CAD</b>In USD-CAD For expiry One year <br />Buy 1.2600 USD Calls <br />Sell 1.3400 USD Calls <br />Approx cost 244 CAD points <br />both in equal amounts. <br /><br /><b>TMM #18: Long AUDNZD </b>A way to express re-flation trade. Terms of trade between the two countries express a commodities skew towards metals & energy - In addition, for the kiwi leg, they basically have a socialist leader who thinks their current low unemployment is still too high and wants a weaker NZD <br /><br /><b>TMM #19: Buy/pay 5s10s breakeven steepener </b>Equilibrium breakeven spread even in the recent low inflation rate environment has been ~50bps, you can pick up a steepener these days with less than 10bps downside before the breakeven spread becomes inverted for ~40bps upside as a way to capture risks of duration sell-off in the long end<br /><br /><b>TMM #20: Short US High Yield </b>If rates go higher, you win, if Vol goes higher you win, if growth slows down you win. Of course you lose if 2018 is a repeat of 2017 but the carry is a small price to pay. Though it is possible that spreads tighten more and the rate movement does not offset all of the gain.</span></span><br />
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<span style="font-size: large;">Shawn</span><br />
<a href="mailto:TeamMacroMan@gmail.com"><span style="font-size: large;">TeamMacroMan2@gmail.com</span></a><br />
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<a href="https://twitter.com/EMinflationista" target="_blank"><span style="font-size: large;">@EMInflationista</span></a><br />
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EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com12tag:blogger.com,1999:blog-34323687.post-37379135096306772017-12-06T04:33:00.004+00:002018-04-14T02:08:44.984+01:00A Call to Arms: Give Us your Best Trade Idea for 2018...Can We Beat Goldman?<div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">When I posted <a href="http://macro-man.blogspot.com/2017/12/back-trading-lets-unpack-goldman-sachs.html" target="_blank">a retrospective on Goldman Sachs’ 2017 Top Trade ideas</a>, 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..." </span><span style="font-family: "arial"; font-size: 14.6667px; white-space: pre-wrap;">Who knew there was such decorum, humility and understanding out there… </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Quick point on rates...most interesting thing I saw in the markets this week was the Citibank US rates team alluding to </span><a href="https://www.bloomberg.com/news/articles/2017-12-04/blame-japanese-banks-for-the-flat-treasury-curve-citigroup-says" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">a big long-end UST flow from domestic pension funds</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">. This ties into the point I made about price action implying a distinct flow in the market due to the divergence of the <a href="http://macro-man.blogspot.com/2017/11/long-end-us-rates-continue-to.html" target="_blank">long end of the treasury curve with global breakevens relative to oil prices</a>. Once again today the long end dip got bought in size--this trend isn't going away soon. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">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. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">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: </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">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 </span><a href="mailto:TeamMacroMan2@gmail.com" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">TeamMacroMan2@gmail.com</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">I will aggregate the results and post them with names removed early next week. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">For those looking for some inspiration, I submit the following…</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">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, </span><a href="https://www.peakprosperity.com/blog/113383/what-could-pop-everything-bubble" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">“What Could Pop The Everything Bubble”</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> by Charles Hugh Smith.</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">And in honor of the Macro Man poetry tradition:</span></div>
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<div dir="ltr" style="line-height: 1.7999999999999998; margin-bottom: 0pt; margin-top: 0pt; padding: 0pt 0pt 0pt 33pt; text-indent: -33pt;">
<span style="background-color: transparent; color: black; font-family: "georgia"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">At length corruption, like a general flood,</span></div>
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<span style="background-color: transparent; color: black; font-family: "georgia"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Did deluge all; and avarice creeping on,</span></div>
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<span style="background-color: transparent; color: black; font-family: "georgia"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Spread, like a low-born mist, and hid the sun.</span></div>
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<span style="background-color: transparent; color: black; font-family: "georgia"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Statesmen and patriots plied alike the stocks,</span></div>
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<span style="background-color: transparent; color: black; font-family: "georgia"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Peeress and butler shared alike the box;</span></div>
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<span style="background-color: transparent; color: black; font-family: "georgia"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">And judges jobbed, and bishops bit the town,</span></div>
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<span style="background-color: transparent; color: black; font-family: "georgia"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">And mighty dukes packed cards for half-a-crown:</span></div>
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<span style="background-color: transparent; color: black; font-family: "georgia"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Britain was sunk in lucre’s sordid charms. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">-Alexander Pope, as quoted in the introduction of the South Sea Bubble Chapter of </span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Extraordinary Popular Delusions and the Madness of Crowds </span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">by Charles Mackay</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">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. </span></div>
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<div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Top Trade #1: Position for more Fed hikes and a rebuild of term premium by shorting 10-year US Treasuries.</span></div>
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<div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">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. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Top Trade #2: Go long EUR/JPY for continued rotation around a flat Dollar.</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">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. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Top Trade #3: Go long the EM growth cycle via the MSCI EM stock market index.</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">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. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Top Trade #4: Go long inflation risk premium in the Euro area via EUR 5-year 5-year forward inflation.</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">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--</span><a href="http://macro-man.blogspot.com/2017/11/long-end-us-rates-continue-to.html" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">as noted I prefer the TIPS version. </span></a></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Top Trade #5: Position for ‘early vs. late’ cycle in EM vs the US by going long the </span><span style="font-family: "arial"; font-size: 11pt; white-space: pre-wrap;">EMBI Global Index against short the US High Yield iBoxx Index.</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">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.</span></div>
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<br />
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Top Trade #6: Own diversified Asian growth, and the hedge interest rate risk via </span><span style="font-family: "arial"; font-size: 11pt; white-space: pre-wrap;">FX relative value (Long INR, IDR, KRW vs. short SGD and JPY).</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">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. </span></div>
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<br />
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Top Trade #7: Go long the global growth and non-oil commodity beta through </span><span style="font-family: "arial"; font-size: 11pt; white-space: pre-wrap;">long BRL, CLP, PEN vs. short USD.</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">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 </span><a href="http://www.eldinamo.cl/nacional/2017/12/05/luksic-y-frase-guillier-genera-odio-lucha-de-clases-y-division/" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">opponent recently took to quoting Che Guevara.</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> Goldman thinks CLP will be supported by “what opinion polls suggest is likely to be a market-friendly outcome in the upcoming Chilean </span><span style="font-family: "arial"; font-size: 11pt; font-style: italic; white-space: pre-wrap;">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. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">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 </span><a href="https://www.amazon.com/dp/B000FCKC3I/ref=dp-kindle-redirect?_encoding=UTF8&btkr=1" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">“Wisdom of Crowds” </span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> 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.</span></div>
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Shawn<br />
<a href="mailto:TeamMacroMan@gmail.com">TeamMacroMan2@gmail.com</a><br />
<a href="https://twitter.com/EMinflationista" target="_blank">@EMInflationista</a></div>
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<i>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. </i><br />
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EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com30tag:blogger.com,1999:blog-34323687.post-15505380500601097102017-12-05T21:01:00.004+00:002017-12-05T22:01:18.515+00:00Trump Tax Cuts - Will This Make Volatility Great Again? <i>A quick Public Service Announcement:</i><br />
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Seems like yesterday when we Trump was elected and equities were off to the races - prompting one of the biggest market surprises we've witnessed in a long time.<br />
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The market formulated these two simple equations:<br />
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Trump = bad for stocks, good for volatility<br />
Hilary = Good for stocks, bad for volatility<br />
<b><br /></b> <b>Oops...</b><br />
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Believe it or not, yours truly did not buy this concept and was a major advocate at my previous firm that Trump <b><i>would be good for stocks</i></b>.<br />
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My belief spawned from <i>the possibility </i>of:<br />
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-Deregulation<br />
-Government spending<br />
-Tax cuts<br />
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Plus - the belief in a Trump disaster was prevalent.<br />
<b><br /></b> <b>Oops again...</b><br />
<b><br /></b> Turns out that Trump being president has not led to the end of the world as we know it (yet). After the election, markets have been ripping with a fervor unseen for years. Renowned hedge fund managers who had spoken out regarding the market from the short side have either been consistently wrong/stop out (best case scenario) or carried out in body bags reminiscent of the tech bubble of the 2000's (worst case scenario).<br />
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However, their logic was sound - the Trump presidency thus far had been marred by firings of his own cabinet, lack of progress in terms of failed bills and initiatives, and controversial racial undertones of his various social policies.<br />
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But it didn't matter.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjOztM96I2ORvFOcXoyEnqF-Toj0bI3fxuiam_b9-CP7LOnVoqoRtMGmEcvGBJm50WlpgFIfbtGj0eJFPlCbsr0eG1jT_c2z5lb1Q56N8DWgjOORR0H1r2v0QDqZ3VCHnzEcNnX/s1600/20171205+Trump+Stock+Market+Meme.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="500" data-original-width="501" height="398" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjOztM96I2ORvFOcXoyEnqF-Toj0bI3fxuiam_b9-CP7LOnVoqoRtMGmEcvGBJm50WlpgFIfbtGj0eJFPlCbsr0eG1jT_c2z5lb1Q56N8DWgjOORR0H1r2v0QDqZ3VCHnzEcNnX/s400/20171205+Trump+Stock+Market+Meme.jpg" width="400" /></a></div>
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<b>Fast forward to yesterday!</b><br />
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Now, we finally have something concretely positive from the Donald. The Trump tax bill has been passed by the House and the Senate. Good news right? Hold on a second.<br />
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Trying to tie the corresponding price action to the actual news - we actually had a reversal of risks of sorts after the weekend gap. Surprised? Maybe don't be. This might be a situation where everybody is "in" from the long side.<br />
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The move was nothing huge but then again, large drawdowns usually start as nothing huge with everyone caught offsides. The long end of the curve continues to get bid as the curve continues to flatten. Definitely, something to keep an eye on if you're swimming neck deep in US equities for your portfolio.<br />
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Well, have a good day yall. Btw, be sure to be on the lookout for a very interesting post coming from Shawn for the TMM Top Trades of 2018!<br />
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<br />Macro Clownhttp://www.blogger.com/profile/17196568155114537578noreply@blogger.com4tag:blogger.com,1999:blog-34323687.post-65570041877019294142017-12-04T05:00:00.001+00:002018-04-14T02:08:27.977+01:00Back-trading: Let's Unpack The Goldman Sachs Top Trades for 2017<span id="docs-internal-guid-83aba166-1ff1-980f-a7ee-737cbb87de4f"></span><br />
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<span id="docs-internal-guid-83aba166-1ff1-980f-a7ee-737cbb87de4f"><span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">Don’t ever let anyone tell you this business isn’t hard. If it wasn’t, everyone would do it. Making investment decisions with millions of dollars is not only hard work, it is by definition stressful.</span></span></div>
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<span id="docs-internal-guid-83aba166-1ff1-980f-a7ee-737cbb87de4f"><span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">I remember a colleague once saying he took pride in making money for the school teachers and pensioners that were the main investors in the fund. That's laudable, yet it works both ways--when you go through the inevitable slump where you lose money on a seemingly unending basis, you get this feeling in the pit of your stomach that you’re letting down the teachers, letting down your family, and hmmm, maybe both of them are going to hire someone else for the job if you don’t get your act together.</span></span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">As much fun as it is to look at someone else’s investment recommendations and laugh at their ineptness with the benefit of hindsight, I sympathize. It’s not easy to put yourself on the line and publish your top six trades for 2017 as the folks at Goldman Sachs so kindly did last November. While you might read a little snarkiness in the following piece, it is with the utmost professional respect!</span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">With those disclaimers out of the way, let’s go into the time machine, back to the days when the US had just elected a fresh faced new president had just been elected and the country was brimming with hope and optimism.</span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">Alright, maybe not so much. Trump voters were gloating, Hillary supporters were weeping, and bond investors were running around like their pants were on fire. British voters were some combination of all three. And the Germans were tut-tutting. With that context..on your marks, get set….</span></div>
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<span style="font-family: "arial"; font-size: 11pt; font-style: italic; vertical-align: baseline; white-space: pre-wrap;">Top Trade #1: Transatlantic economic divergences and political risks Long US$ equally weighted against EUR and GBP, with a basket indexed to 100, a target of 110 and a stop at 95. Annual carry on this basket is 1.3%.</span></div>
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<span style="font-family: "arial"; font-size: 11pt; font-style: italic; vertical-align: baseline; white-space: pre-wrap;"><img height="355" src="https://lh6.googleusercontent.com/2iIHdfXTYY47vxBxQguzSfxI_JLODG2S3aDIYGsLk8WAYEsm2L3mAI8mKLJqFv3eCkiZ3v_KZMsFnG0GMWbF3AUkp9BZoL49QfiKE0KxuDDCzUGXAPxGA__YE0ZB5Ag7DAMoTtZY" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="437" /></span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">Uff. Not off to a great start here. Stop City. I’ll say this….the stop at 95 was good trading discipline. </span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">What went wrong? The idea was two fold: 1) The US economy would continue to grow strongly, and 2) The European economy would stagnate, which would combine with political risk on the continent and in Britain to torpedo EUR and GBP. Amazingly, they got #1 right….and they weren’t wrong about political risk in the UK...but that didn’t matter when the economy started to grow. This caught the entire currency market off guard, which had grown so accustomed to using EUR as a funding currency it didn’t occur to them that Europe still possessed 1) a business cycle and 2) an amazingly efficient German export machine. </span></div>
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<span style="font-family: "arial"; font-size: 11pt; font-style: italic; vertical-align: baseline; white-space: pre-wrap;">Top Trade #2: RMB weakening: Long $/CNY</span><span style="font-family: "arial"; font-size: 11pt; font-style: italic; font-weight: 700; vertical-align: baseline; white-space: pre-wrap;"> Long $/CNY</span><span style="font-family: "arial"; font-size: 11pt; font-style: italic; vertical-align: baseline; white-space: pre-wrap;"> via the 12-month NDF, currently at 7.07, for an</span><span style="font-family: "arial"; font-size: 11pt; font-style: italic; font-weight: 700; vertical-align: baseline; white-space: pre-wrap;"> initial target of 7.30</span><span style="font-family: "arial"; font-size: 11pt; font-style: italic; vertical-align: baseline; white-space: pre-wrap;"> with a stop at 6.75.</span></div>
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<span style="font-family: "arial"; font-size: 11pt; font-style: italic; vertical-align: baseline; white-space: pre-wrap;"><img height="266" src="https://lh3.googleusercontent.com/ebIdESgUmGPeeIDaV7L4EjEEMgomsTO8-11GG-qbA0NQgP4Jm42jjbU4tzmfcGh3N9sW-ve6ZBka_s8vnbntsmQvaNORHm8ALaHzcfATx7c7WCdtpnl-LnOPkPm68KqzOCuVZxO0" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="461" /></span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">Ouch. Stop City again. But that Stop discipline REALLY worked this time! Putting in that stop ticket to sell usd/cny at 6.75 felt so, so bad….but it was so, so good. Sometimes the best trade you make is the stop loss! </span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;"><br /></span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">Here was the thesis, in a nutshell:</span></div>
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<span style="background-color: white; color: #222222; font-family: "arial"; font-size: 11pt; font-style: italic; vertical-align: baseline; white-space: pre-wrap;">"The fundamental dilemma of China’s currency regime is that, in an environment of a rising dollar, keeping the CFETS basket stable requires $/CNY to move higher meaningfully, which carries the risk that capital outflows re-escalate," the team writes. "Our base case is one where the $/CNY fix continues to grind higher, driven by domestic pressures and in the context of a stronger dollar."</span></div>
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<span style="background-color: white; color: #222222; font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;"><br /></span></div>
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<span style="background-color: white; color: #222222; font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">What went wrong? 1) The dollar didn’t rise. In fact, quite the opposite. 2) They assumed a risk that capital outflows could, and would re-escalate owing to domestic pressures. Wrong again...local capital outflows subsided notably and there was zero pressure on FX reserves all year. Interesting to note here they missed the most ubiquitous China theme of 2017: Stability in anticipation of the 19th National Congress of the Communist Party in October. For most of Q2 and Q3, you couldn’t swing a dead cat without hitting three analysts telling you the government was doing everything in its power to maintain control over markets and vol until the Congress was behind them. That didn’t even bear a mention...the lesson: narratives can change quickly, even when news doesn’t. </span></div>
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<span style="font-family: "arial"; font-size: 11pt; font-style: italic; vertical-align: baseline; white-space: pre-wrap;">Top Trade #3: Earning the ‘good carry’ in EM, hedging the China (and CNY) risk</span><span style="font-family: "arial"; font-size: 11pt; font-style: italic; font-weight: 700; vertical-align: baseline; white-space: pre-wrap;"> Long an equally-weighted basket of BRL, RUB, INR, ZAR versus short an equally-weighted basket of KRW and SGD,</span><span style="font-family: "arial"; font-size: 11pt; font-style: italic; vertical-align: baseline; white-space: pre-wrap;"> with an entry level of 100, total return target of 114 and stops at 93. The expected return, including approximately 7% carry (on an annual basis) and 7% price return, is around 14%.</span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">Here’s one that worked...the basket didn’t quite reach the 114 target but we’ll take it! The story here is all of these currencies did reasonably well...so while successful this is more of a beta story rather than alpha. </span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;"><img height="288" src="https://lh5.googleusercontent.com/wCbz6urNjbfs1PEpqGCT8tfJ4WYsSAfLxvnEJa3u-uSoxoJ1aLYQTnUNTE3QVwrheZBWTxd3A9pI3Iaohe4g4blMqDjHGeruOhsqpSa_WIAIE_pDnfJu3L79-w54v5Pj9trKe7kT" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="481" /></span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">INR and RUB could be considered “good carry” in 2017, as India benefited from strong growth and improved productivity and RUB took advantage of the weak USD and higher oil prices. BRL and ZAR turned in decent performances, thanks in no small part to hefty carry, but they left you with more than one sleepless night. The core theme was right--long high-beta EMFX funded by low-beta/low-rate Asian exporters. Nice trade. So let’s not split hairs here...we’ll chalk this one up as a W!</span></div>
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<span style="font-family: "arial"; font-size: 11pt; font-style: italic; vertical-align: baseline; white-space: pre-wrap;">Top Trade #4: Long EM equities with insulated exposure to growth Long Brazil, </span><span style="font-family: "arial"; font-size: 11pt; font-style: italic; font-weight: 700; vertical-align: baseline; white-space: pre-wrap;">India</span><span style="font-family: "arial"; font-size: 11pt; font-style: italic; vertical-align: baseline; white-space: pre-wrap;"> and Poland equities (BOVESPA, NIFTY, WIG)</span><span style="font-family: "arial"; font-size: 11pt; font-style: italic; font-weight: 700; vertical-align: baseline; white-space: pre-wrap;"> FX-unhedged</span><span style="font-family: "arial"; font-size: 11pt; font-style: italic; vertical-align: baseline; white-space: pre-wrap;">, with an entry level of 100, for a target return of 120 and a stop of 90.</span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;"><img height="244" src="https://lh3.googleusercontent.com/IHbGA92En5s5vsGb_YnTArK_rPaB5w1h99PzwgkIDehIv5v6ivBAa564VxvAQBkdOuWIbQoHi-djS1KKdIVdeALNn3oseFdH08iKAx2pftngiukLqBPY9C6hwoQkN-dhHUrHj7ah" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">Nothing to even discuss here--this trade crushed it out of the park. The chart above uses the iShares ETFs for each country as a proxy for the local index FX-unhedged. Great work, Goldman Equity Guy! </span></div>
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<span style="font-family: "arial"; font-size: 11pt; font-style: italic; vertical-align: baseline; white-space: pre-wrap;">T</span><span style="font-family: "arial"; font-size: 11pt; font-style: italic; white-space: pre-wrap;">op Trade #5: The ‘reflation’ theme extends and broadens Long US 10-year US TIPS ‘break-even’ inflation at an entry level of 1.90%, with an initial target of 2.30% and stop at 1.60%, and long Euro 10-year inflation via swaps at an entry level of 1.25%, with a target of 1.60% and a stop at 1.00%.</span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;"><img height="479" src="https://lh4.googleusercontent.com/aal8yVYUtejtmRYr39PBJLQXhaxxkz7KalFWvToxLGV8hfTGE4YiBGc4gq3vYDym39pVNn9cE66igyYG6bn_vwwa449139S3itmrPjnAv1Pi_evLK-kD2d_IrvZbktz39xKTwlW7" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">We’ll give credit on this one too...I mean really, paying inflation in 2017!?! You had already missed the “easy money” in this trade after inflation breakevens ground higher from historic lows in mid-2016. Then the US election bear steepened global curves and moved BEIs materially higher. Then Goldman comes out and says “don’t stop now...we’re just getting started...” On a theme that hadn’t worked consistently in at least a decade. </span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">I’ll give full points for degrees of difficulty here--In 10y TIPS….paying at 1.90% was a momentum trade last November that looked absurd by the summer as one inflation print after another came in below expectations. But it has come back to within spitting distance of the entry point as some big investors have paid up for inflation protection in size, as we discussed here last week. </span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">The 10y EUR swap trade hasn’t quite gotten to to the 1.60% but we may get there by year end...and even if we don’t, a 30bps move is a spicy pickup in that space. Was stronger growth part of the elixir? Not really, but sometimes the trade works for the wrong reason, and we don’t argue. </span></div>
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<span style="font-family: "arial"; font-size: 11pt; font-style: italic; vertical-align: baseline; white-space: pre-wrap;">Top Trade #6: Long equity-like ‘carry’ with little duration risk through dividends: Long EURO STOXX 50 2018 dividends Long EURO STOXX 50 2018 dividends (BBG: DEDZ8 Index) equity-like ‘carry’ with little duration risk; target 125, now at 112 (12% unfunded return), stop at 105.</span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">I’m not sure what this one means. Dividends probably had a good year, thanks to continued low rates, strong profit growth, and good equity returns. If someone wants to send me the DEDZ8 chart, I’ll post it, but I’m just going to say it probably had a decent run and move on with my life.</span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">So there it is...two dead wrong, “why, oh why did I do that” stop losses (#1, #2). two doubles into the gap (#3, and #6 which I’m willing to amend this upon further evidence), a clean single (#5), and a three-run bomb to deep center (#4). </span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">Make no mistake...what you see above a pretty good slugging average, especially coming off of 2016 when these guys got carried out of four trades before January was over. Can they do it again in 2018? Stay tuned, we’ll go through Goldman’s top ideas for 2018 tomorrow. </span></div>
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Shawn<br />
<a href="mailto:TeamMacroMan@gmail.com">TeamMacroMan2@gmail.com</a><br />
<a href="https://twitter.com/EMinflationista" target="_blank">@EMInflationista</a><br />
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EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com12tag:blogger.com,1999:blog-34323687.post-43682100728684493472017-11-29T18:30:00.002+00:002018-04-14T02:08:12.480+01:00Long-end US Rates Continue to Outperform--Worth a Fade Here.<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><a href="http://macro-man.blogspot.com/2017/11/energy-prices-dragging-headline.html" target="_blank">On Monday</a>, I brought up what 2018 could bring from the Fed, and the possibility that the FOMC might have to react to higher headline inflation, even if it is being driven by higher commodity prices. This is likely to have been a factor in the 20bp selloff in the front end of the us curve since early September….but the long end has been solid as a rock, leading to an epic flattening. </span><br />
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<span style="font-family: "arial"; font-size: 11pt; white-space: pre-wrap;">I questioned what would steepen the curve--the catalyst is unclear, but after a little more digging, the strength of the flattening move looks more disjointed from global trends that I had previously believed. Subdued volatility, complacency and a ton of flows into long end bonds and inflation-linkers look to be behind the move over the past couple of months.</span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Back in October, I also posted that <a href="http://macro-man.blogspot.com/2017/10/european-inflation-breakevens-showus.html" target="_blank">there has been a strong correlation between EUR and US inflation premiums</a>, and the lack of a breakdown in that correlation illustrated that additional supply and potentially higher growth and inflation resulting from the proposed US tax reform hadn’t been priced in. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Well, I was right, that correlation was about to break down….it just broke down in the opposite direction. Don't let anyone tell you making money in these markets is easy. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="288" src="https://lh3.googleusercontent.com/jsoSL-9nuJijl4w0omTnO-c0GA-tgqf99aA3oNgOPTgHo_40UBHrjRhsuiD3KsdKmzEjECxDid7rym1N3uOxWHjiKR_VIKMsLVZJ9QRSLV9xdV98A_7HsIZRuiW-YV9KQQWGrK1v" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="480" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Since late September, 5y5y EUR inflation swaps have moved roughly 15bps higher, while the US CPI inflation swap has done nothing. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">This increase in EUR inflation expectations has been driven by the increase in oil prices...</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="288" src="https://lh3.googleusercontent.com/Af8fWQcsxGel3qg1nODXmuuu24xeKO-g902OzZzI6wUWjVXV_9yAtb8_CGmdczHs_fkqQ--pX2Dy9pqAewbb9nPE2gkVRpOqwP7wvQVqoA9vcGcFjybumIxBe14lFaxxtDOC3_c0" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="480" /></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Yet the US inflation swap has ignored the oil move completely.</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="288" src="https://lh6.googleusercontent.com/edp5R7urP2OOP7HZrV2I7RvrOgtZ7SF4h9sWuC16AMTU_zEiQefopkz4b2L-y6iSdqfv2Jdrq9AZRZB4za3DRX4fsCZ23EoxWtly-78kFPgnnoRrXXsZSrqhQSoT1vwZuy4aO_k-" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="480" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Is there a trade here? Let’s look under the hood. A simple regression analysis shows US breaks are too low. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="257" src="https://lh4.googleusercontent.com/KLu9DriSbERY-aueZLs2HNrKU8l2y2U28dOVljoW-l4qOqmQqLA9gExaMFmKf464SpTAlbfRSttXd1Ge5mSE_6XC5bbjzzEZHL_woMKNzLMniRZbO-140UWoIgexCIT_Dk-uZuuG" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">And the diversions here have been linked to macro events--the Brexit shock in mid-2016, US election in late-2016 and USD strength/ECB tapering move in April 2017. I’ll save some space and a couple more charts and just say the real rate and nominal rate regression components are skewed in opposite directions, which is what leaves the inflation breakeven component looking roughly 10bps too rich in the US. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="288" src="https://lh6.googleusercontent.com/TMwbsXzEgl8UeNZZg_sQ2WE91eYEesUNI6dZo1T2YMYsU7JpAn7x0JDbko2-nY0rXuDkY9x8JmAhQTF99m5s4kIJ1I5b4KSq9TGXnLMTB5fH-wzq9nQwm5Wh6DLodWDnxId1wTRq" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Oil is higher, labor markets are tight, and we have </span><a href="http://www.frbsf.org/economic-research/publications/economic-letter/2017/november/contribution-to-low-pce-inflation-from-healthcare/" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">more evidence that transitory factors on core inflation might lighten up next year</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">, although not totally mean revert. These should all be supportive of paying 5y5y US breaks. What else might push us inflation, and thus long-term inflation premiums, higher? </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">USD has been choppy, but import prices have been rising. I nicked this chart from JP Morgan showing there is a lagged relationship between higher import prices and an increase in core goods CPI. The smart guys at JPM think this will contribute to higher inflation next year. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="411" src="https://lh6.googleusercontent.com/k8RMIlLUmJUXut6JoDemNS_MMlYcXWGraDfnhH4l-vnO8EotUPg5g9HeOHTNNPmjHK0q9UzzJiUuktrI5J91ZxZ9iVDfP2mAWv9iOUd4ZxQWJw6TY9Ap4tsheY4Oa-emM1ZA7HLM" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Then there is the factor that I alluded to back in October: Supply. If Trump’s tax reform passes there will be more bonds and more duration for the market take down. The fiscal stimulus will also be inflationary at the margin--perhaps not a big impact on headline figures but certainly supportive--something the market has ignored completely. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="331" src="https://lh6.googleusercontent.com/AE_FB-4ktsCph7xpDF0E3ZqVulS_uui4_1SrMkpkz6FxY6tvg18p7a94_pV5vAdvva_vO3oaDrZSG9XJbBydZc7XFDYx2RIjL-N7RixMxE2qyx-TuFEurgeKFeMpTgggm4Cb5KWz" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="386" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Backing up to the global picture, 2018 will be another year where a ton of bonds will need to find a home...and central banks are closing their doors. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="323" src="https://lh5.googleusercontent.com/By3V_5NmNp5V-YKbeNpUb1HYO2skTIUBLshSOPftmfsONz9_ohYXcJnYgebwOdpxlEEtCTV5Iwr0iHomkk0iEX9n29LFyis6zd8E5nxhfcHEf1JEZ2kc5XVDeo8yrdv3CTfh5B6J" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="385" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The big buyers will again be central banks, commercial banks and pension funds...</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="504" src="https://lh5.googleusercontent.com/ie5zhKDje-vk9rht18A9O3LZ_ZP0HUQTNWbP8qrIpSC4BgNaob6hJPDYcEaaivXY2Ygd_5Sd8LvOTYvOts2weXkjX3h3YLoRmAtv-Qb6P2XjtY5LaFy4q0GKrC91P_LQEHuOUeFu" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="524" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">But the supply/demand balance in that chart assumes retail demand equal to the estimated </span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 700; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">$900bn </span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">in inflows for this year. That would be an extremely surprising event in the context of the current macro fundamentals. Even a small downtick in retail flows is going to be a painful event for global fixed income curves. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="301" src="https://lh5.googleusercontent.com/iQ_SSM0xihr6n-cBPWe8NOkWbE4wEr4YtAVJnjuBoOHeTBEPr3oyYui-6_dmteVbS5dIWLVXoC_CGXIxuGRKZLffipg1-WiQ59mXcVlVZYqKZ-3y6Cju2QL4tZXa78QOqgVTH-7M" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="519" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">And while I don’t have higher frequency data, inflows over the past two months have been very strong. Moreover, the richening of long end swap spreads amidst the rally in oil, advancing tax reform plans, and stability of long end breakevens argues there has been a very big buyer in the long end soaking up natural sellers of duration. It all adds up to long-end US rates simply looking too rich. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="288" src="https://lh6.googleusercontent.com/ZZ0xGZ0CbXLCe0lx8_lPLsyTN5157cL8P4jrv_QbJhNBnmVGiZ3OY8eCypSGUrGU3UrKGibceyzZ66QqycX6w3_B5R26R0bOG--JuV18bqYnG_BzR3Gu5SI2jaM1ZJBWBq6cOjdb" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="480" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">One might be able to write that off to Treasury’s plans to issue more short-term bonds, or the Dudley’s ”r* lower/flattening forever” speech that I alluded to on Monday. But it all seems a little too perfect. Long end US term premiums and inflation expectations are simply too low given the macro factors that supports them. </span></div>
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Shawn<br />
<a href="mailto:TeamMacroMan@gmail.com">TeamMacroMan2@gmail.com</a><br />
<a href="https://twitter.com/EMinflationista" target="_blank">@EMInflationista</a><br />
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EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com40tag:blogger.com,1999:blog-34323687.post-40691888495127958862017-11-27T16:21:00.003+00:002018-04-14T02:07:49.542+01:00Energy Prices Dragging Headline Inflation Higher...Does the Fed Care? <div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">To those in the US, welcome back from the most American of holidays. I’m sure there are other countries that have holidays largely devoted to gluttony, but as is often the case, America imported a good thing and made it better. Well, bigger and more gluttonous, anyway. Who else would have woven in nine hours of football and materialist retail bonanza into a celebratory feast day? Heck, now you don’t even have to drive to a retailer at sunrise and risk getting trampled to death to grab the best Black Friday deals. You can do it while sitting on the couch! Well done, America. U-S-A! U-S-A! </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">I’m back at my desk after a travelling for a couple of weeks and spending much of last week considering, buying and preparing my contributions to the Thanksgiving Day feast. The big story of the past two weeks has been the re-pricing of the front end of the curve in the US: </span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br class="kix-line-break" /></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="312" src="https://lh3.googleusercontent.com/2kDZUSEwRbgfohwNlcE5-fwaa5KQqMWHFBIVCVyZGwVOuUCowt26t0oy09UqF7gdVNVYzRR74zSBILPSrTiq2D-Z1do_xioTqSHsYX7HPOqKniHzkbXzjLHWuCf703vWRkSnZAno" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">You don’t get a 30bp move in the 2y with the the 10y pinned in a 10bp range over a six week period without considering the message the market is sending to the Fed. Clearly there isn't much cooking in term premiums....the market hasn't lost faith in the lower natural rate, r*, or whatever you want to call it. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="462" src="https://lh5.googleusercontent.com/Jm7BBp3Rg2bqr5EdZ8Yv4d3_ZjknmRyGbUUaqm3Wpt3DMmMI9_H13pvdzoIOiE0Ax1a6jn2Ng0cq0AX91YiYmyv51Rt78hyJ7QbPfrXjzJ0s7Xp9vUT-KwkmbQB7dpl3kGMJoMwZ" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="469" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Which leaves us with this move in the front end, and what it all means. Please use the comment section to tell me what you think the market's message is...my two contributions would be 1) “there’s still a ton of liquidity out here”, and 2) “we don’t think the business cycle is sustainable, nor do we believe core inflation dynamics are going anywhere.” </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br class="kix-line-break" /></span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Before this slips into another “curve shape” post, it is the second message I want to focus on. While there has been little evidence that “demand-push” inflation is outside what we might expect at this stage of the business cycle, the buried message is related to big increases in oil, gas, and fuel oil prices since early this summer. As much as they will tell you these prices are “transient” and thus don’t impact monetary policy, they will likely be tough to ignore in 2018 because they will hit consumers in the pocketbook and push headline inflation higher. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> </span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">We all know what the crude chart looks like, with the move from the low 40s to the mid-high 50s in WTI, roughly a 30% move. There has been a similar move in residential heating oil: </span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="343" src="https://lh3.googleusercontent.com/OriEfPJFSXMIJG_f-QMfOlhhBCPDYxSEvR0BJlq2YEUnJ4WoLbIDEKVs7FQnWXq2peRUBXIkrhsQX0FvBDu1uOORMBtjsLxcR_KqCAvoPcPiuuxBUDM8PWsa_S_JhFOT1H-1lE5b" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="489" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">And as we come into the heating season, prices are tracking well above last year: </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="316" src="https://lh6.googleusercontent.com/8HFj0BlVrvXf8fkHw_yCqEruhcl0YGfOP0TY7KAnp5W_nPXn8NO8ikf3Vo_JS7A3QgYZ6qeybV54vnSha9xPzAgKunDyoa2N-l7qfU6v2IPZGhDaEt_ePAHxQkmAR_744eTDb4KN" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">And inventories are approaching 5-year lows, which argues for big prices increases if we get a cold winter (that being said, I’m planning on running outside in a t-shirt today). </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="316" src="https://lh4.googleusercontent.com/Y57fJqWRdvlA_EM2xA3e8StWaxG1nLVq5Shr4gJIvDoYxfpGzHsbY76Q89ht9hQF9Yd0WO23jDkwCewMgg8DIxQ769hAzKksDgkHX4zWurTqHydVo-2FYQGJ_uKaxbZ9rQlgKKzI" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">There have been similar price increases throughout the energy complex--gasoline tends to grab the headlines, and has been somewhat spared--but the marginal increase in global demand in 2017 has been the big story, and the impact on headline inflation is likely to show up in early 2018 just as the Fed is wrestling with what to do next. At the very least, these price increases have to play a role in the December Summary Economic Projections...the dots. </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The FOMC will have a tough time justifying headline inflation projections aren’t rising, and they have a preternatural desire to write off energy-driven inflation as a transitory factor. But time and again energy is the tipping point for changes in the speed of the economy. It will be acting as a brake here...leading to the flattening of the curve. That combination has painted the Fed into a corner. Do they have the guts to continuing hiking if the economy is doing well, headline inflation is pushing higher, but core continues to lag behind?</span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">It seems like the answer is yes...can they get away with four hikes in 2018? If so, 2x10s is going to zero…. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Absent a big move in core, what can change the demand for duration in the long end? Can this chart steepen the curve? </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="360" src="https://lh4.googleusercontent.com/jvhrt_IEehfqdEsM9cr23L_3HGuPlVdwCoXMbGwohg-g0vwrt8ZD0OHUSeMscewxTmBGFt4pbQDwTcHbESnRVZXlFEn5_Ojm5OVoKmsPo0pZKEmMZA2JPcWQoAXHPATLJQBB2C-3" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="520" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Or will US tax reform put a supply-side kick in the long-end? Supply doesn’t matter...until it matters. There will need to be a catalyst to change the narrative for buyers of duration...the demand side. I can’t see what it can be other than core inflation--probably on a global scale. While I continue to believe measures I have discussed in the past like the NY Fed’s underlying inflation gauge show there is price pressure in the economy, the market just won’t believe it until it really gets out of hand and forces the hand of not just the Fed, but of the ECB, BoJ, and even the PBoC.</span><br />
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Until then, the only thing out of hand is this flattening trend. And bitcoin. </span><br />
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span>
Shawn<br />
<a href="mailto:TeamMacroMan@gmail.com">TeamMacroMan2@gmail.com</a><br />
<a href="https://twitter.com/EMinflationista" target="_blank">@EMInflationista</a></div>
EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com191tag:blogger.com,1999:blog-34323687.post-73664939754548397412017-11-11T16:15:00.002+00:002017-11-13T11:12:01.275+00:00Case Study: Can Gold Rally Along With Inflation?So I woke up a few days ago and saw this <a href="https://www.wsj.com/articles/inflation-the-slumbering-giant-begins-to-stir-1509289500"><span style="color: blue;">WSJ piece</span></a>.<br />
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Yes, world; letting real rates stay negative for so long was probably going to do that.<br />
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I thought it would be a good excuse to compose another thought piece. Like the kids say: here goes nothing.<br />
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Now <a href="http://macro-man.blogspot.com/2017/09/soapbox-thought-piece-on-long-term-view.html"><span style="color: blue;">we've detailed potential drivers for inflation in the past</span></a> - with oil ripping towards new highs (Saudi-corruption-purge-driven or not), nominal rates ripping higher, and stocks falling, I was curious to also see gold also down.<br />
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I am a strong believer that gold trades like a currency rather than a commodity. Commodities for the most part trade based on supply and demand. The demand function is usually the result of end-use products that during special situations may be propelled further by speculative fervor.<br />
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Oil gets turned into gasoline and put into vehicles, grains, softs, meats get eaten, metals get thrown together to make cool stuff, etc. etc.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgLVQaeCbixJeg3BTX4Id7f49fDcpC6zGfrksClq2m7TB9kwArt-AUE-IODdmeB6ZEJzwGYTOxkzb94Cd37zyIHphvsY-sGGCw_zXZ7pM9iwhVmZGNUB-B1KeyhKyhy3yQ2naSm/s1600/20171006+Commodities.jpg" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="501" data-original-width="890" height="225" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgLVQaeCbixJeg3BTX4Id7f49fDcpC6zGfrksClq2m7TB9kwArt-AUE-IODdmeB6ZEJzwGYTOxkzb94Cd37zyIHphvsY-sGGCw_zXZ7pM9iwhVmZGNUB-B1KeyhKyhy3yQ2naSm/s400/20171006+Commodities.jpg" width="400" /></a></div>
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The supply function, in many aspects, behaves in accordance with price. Price goes higher, people invest in getting more of that high price "stuff" whatever it may be and vice versa.<br />
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Gold is a bit different. Why? Like all commodities, it can store some value. But the key difference here is the fact that global central banks, those crazy economic professor types, deem it as a viable form of storer of value and medium of exchange so much that they accumulate it as reserves.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgHWe2sC7Kh4DhJkV8PNP1A67NWjQb8wn4VxeBMLT-NR53a9lzomMsGi1aHZisX4lmtxYi3jjc6LrY7pTxj1pijcAfjZRzIhBtjXDqmI_z50_ig2Edtem_QfhAZ0lHnLFerXOaZ/s1600/20171006+Central+Bankers.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="532" data-original-width="900" height="236" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgHWe2sC7Kh4DhJkV8PNP1A67NWjQb8wn4VxeBMLT-NR53a9lzomMsGi1aHZisX4lmtxYi3jjc6LrY7pTxj1pijcAfjZRzIhBtjXDqmI_z50_ig2Edtem_QfhAZ0lHnLFerXOaZ/s400/20171006+Central+Bankers.png" width="400" /></a></div>
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As a result, gold more than any other precious metal trades like a currency based on the rates of the country that it's denominated in.</div>
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So here we are at the focal investigation of the post. Hypothetically, if inflation rises (let's not argue this right now and just assume such is the case), will gold be a good hedge? </div>
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Let's go to the charts first, since I'm lazy.</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgkoQUSnU5GS02b_Hko04NeaEJNPJlpITzGD1q6o6lS5rSkIEyWZd92uxHCeSfK4H17x-M9ismG4Oqkiax0AYtAoYEUQMR1Sg4_gQjTwOaPRseUYbV66CONlJfgCdsQf5BP6nWr/s1600/20171010+Gold+Regressions+vs+Rates.jpg" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="1200" data-original-width="1600" height="480" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgkoQUSnU5GS02b_Hko04NeaEJNPJlpITzGD1q6o6lS5rSkIEyWZd92uxHCeSfK4H17x-M9ismG4Oqkiax0AYtAoYEUQMR1Sg4_gQjTwOaPRseUYbV66CONlJfgCdsQf5BP6nWr/s640/20171010+Gold+Regressions+vs+Rates.jpg" width="640" /></a></div>
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Yes, yes I know - I didn't get the chance to run the regression on returns vs returns - I have a very finite window to use BBG and the files I build I cannot keep. On top of that, without a BBG API, it takes a horrific amount of time to manually extrapolate the real yield (before the existence of TIPS) by interpolating the CPI.</div>
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With my whining aside, even with an "incorrect" price vs price regression - you can observe the directional relationship between gold and those rates. Also, <i>the relative relationship between the different rate products</i> <i>vs gold </i>should be valid as well (the base effect from the regression of price vs price as a result of the level differences <i>should be somewhat </i>negated as all the rate products are roughly on the same base level).</div>
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<b>Spot gold px vs real yield shows the tightest connection here. So we'll focus in on that one for a sec.</b></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgVQzJ_DS_-MGPYqcx9A5VZkRrM1nS3lj2C-z6FDd7tCN5Op_l_NqaUtzR9jxz5qzR_J4svfJ4lkMRndbdihGVepY54tV2isBZm9caAPfULBLhL8NOnv6NE7nX7Su2E5y_1M5Zy/s1600/20171031+Real+Yield+vs+Gold+Px.jpg" style="margin-left: 1em; margin-right: 1em; text-align: center;"><img border="0" data-original-height="1200" data-original-width="1600" height="480" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgVQzJ_DS_-MGPYqcx9A5VZkRrM1nS3lj2C-z6FDd7tCN5Op_l_NqaUtzR9jxz5qzR_J4svfJ4lkMRndbdihGVepY54tV2isBZm9caAPfULBLhL8NOnv6NE7nX7Su2E5y_1M5Zy/s640/20171031+Real+Yield+vs+Gold+Px.jpg" width="640" /></a></div>
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From the above, it is evident that gold goes down when real yields go up in a semi-lockstep fashion. (I assume the economic driver here is: holding gold which yields nothing vs holding a currency which in some situations can yield a lot in real terms and in other situations can yield very little or even negative in real terms)</div>
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<b>Conclusion 1 - Gold trades rather closely with real yields. Although there are sure to be other factors influencing the gold price, it is roughly over the long term a function of real yields.</b></div>
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Moving along. Assuming the answered found in Conclusion 1. Can<b><i> </i></b>gold <b><i>always </i></b>be a good hedge for inflation? Or better yet, can real vs nominal yields diverge (widening of breakevens and thus the emergence of "inflation") without real yields actually going up significantly (real yields going up would theoretically put significant downward pressure on gold)</div>
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Let's look at some different yield regimes. </div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh3R8nVZoE2RmirthQvx-H-syACZ83p26rrXskeLnpmZ7j_sxQK5Vgd53pS4PVPnHFHG4eJaHpnIdPD0ZrLJWql0LR0OAYIkq2dOw-HHJJjoclxWJK4Kx-cZ16LCuaf_j0gcySD/s1600/20171031+Nominal+Rates+vs+Fed+Funds+Rate.JPG" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="540" data-original-width="1600" height="214" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh3R8nVZoE2RmirthQvx-H-syACZ83p26rrXskeLnpmZ7j_sxQK5Vgd53pS4PVPnHFHG4eJaHpnIdPD0ZrLJWql0LR0OAYIkq2dOw-HHJJjoclxWJK4Kx-cZ16LCuaf_j0gcySD/s640/20171031+Nominal+Rates+vs+Fed+Funds+Rate.JPG" width="640" /></a></div>
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The two main interests that occupy my focus for this experiment. They are the high inflation periods of the 70's and 80's as well as the periods of shock post the dot-com bubble and the GFC.</div>
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Now I'm going to add some events to shed some qualitative light on the various worldly happens which caused individual reactions to rates. </div>
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FYI, for those with a short attention span - this will be a very long table.<span style="color: red;"> I will highlight in red those times when real rates were likely zero or negative (higher inflation vs fed funds rate)</span> and I will also provide a summary at the bottom.</div>
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<i>Disclaimers: </i></div>
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The inflation prints were averaged out for entire years while the Fed Funds rate is printed on the table only when a change occurs. Basically, this analysis is far from perfect. </div>
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However, assuming that those highlighted periods were times when real rates were either negative or close to zero is probably semi-safe. Besides, what's life without the right amount of danger, eh?</div>
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Those with the curiosity of a cat and armed with a Bloomberg terminal can hopefully use this as a launch pad for additional analysis.</div>
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<table align="center" border="1" cellpadding="1" cellspacing="1" style="background-color: white; border-collapse: collapse; border: none; box-sizing: border-box; color: #222222; font-family: Publico, Times, "Times New Roman", serif; font-size: 17px; margin: 0px; padding: 0px; table-layout: fixed; width: 672px;"><thead style="box-sizing: border-box;">
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><strong style="box-sizing: border-box;"><span style="font-size: x-small;">Date</span></strong></th><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><strong style="box-sizing: border-box;"><span style="font-size: x-small;">Fed Funds Rate </span></strong></th><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><strong style="box-sizing: border-box;"><span style="font-size: x-small;">Event</span></strong></th></tr>
</thead><tbody style="box-sizing: border-box;">
<tr style="box-sizing: border-box;"><th colspan="3" style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><strong style="box-sizing: border-box;"><span style="font-size: x-small;">Fed Chair Arthur Burns (January 1970 - March 1978)</span></strong></th></tr>
<tr style="box-sizing: border-box;"><th colspan="3" style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">1971: GDP = 3.3%, Unemployment = 6.0%, Inflation = 3.3% </span></th></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Jan</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">4.5% - 4.0%</span></td><td colspan="1" rowspan="2" style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Expansion.</span></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">Feb</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">3.5%</span></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Jul</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">5.5%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Fed raised rate to fight inflation.</span></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Aug</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">5.75%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;"><a data-component="link" data-ordinal="18" data-source="inlineLink" data-type="externalLink" href="https://www.cato.org/publications/commentary/remembering-nixons-wage-price-controls" rel="noopener" style="background-image: linear-gradient(rgb(7, 131, 171), rgb(7, 131, 171)); background-position: 0px 100%; background-repeat: repeat-x; background-size: 1px 1px; box-sizing: border-box; color: #222222; outline: 0px; overflow-wrap: break-word; text-decoration-line: none; text-shadow: rgb(255, 255, 255) 0.03em 0px, rgb(255, 255, 255) -0.03em 0px, rgb(255, 255, 255) 0px 0.03em, rgb(255, 255, 255) 0px -0.03em, rgb(255, 255, 255) 0.06em 0px, rgb(255, 255, 255) -0.06em 0px, rgb(255, 255, 255) 0.09em 0px, rgb(255, 255, 255) -0.09em 0px, rgb(255, 255, 255) 0.12em 0px, rgb(255, 255, 255) -0.12em 0px, rgb(255, 255, 255) 0.15em 0px, rgb(255, 255, 255) -0.15em 0px, rgb(255, 255, 255) 0.03em 0.075em, rgb(255, 255, 255) -0.03em 0.075em, rgb(255, 255, 255) 0.06em 0.075em, rgb(255, 255, 255) -0.06em 0.075em, rgb(255, 255, 255) 0.09em 0.075em, rgb(255, 255, 255) -0.09em 0.075em, rgb(255, 255, 255) 0.12em 0.075em, rgb(255, 255, 255) -0.12em 0.075em, rgb(255, 255, 255) 0.15em 0.075em, rgb(255, 255, 255) -0.15em 0.075em; transition: all 0.15s ease-in-out;" target="_blank">Wage-price controls</a>.</span></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Nov</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">5.0%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Lowered rate to stimulate growth. </span></td></tr>
<tr style="box-sizing: border-box;"><th colspan="3" style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">1972: GDP = 5.2%, Unemployment = 5.2%, Inflation = 3.4% </span></th></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Mar</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">5.5%</span></td><td colspan="1" rowspan="2" style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Raised rate to combat inflation. Confused markets.</span></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Dec</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">5.75%</span></td></tr>
<tr style="box-sizing: border-box;"><th colspan="3" style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">1973: GDP = 5.6%, Unemployment = 4.9%, Inflation = 8.7% </span></th></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">Jan</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">6.0%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">Raised four times that month.</span></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">Feb</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">6.75%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">Lowered to 6.5%, then raised to 6.75%.</span></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">Apr</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">7.25%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">Raised for next five months.</span></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Aug</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">11.0%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;"><a data-component="link" data-ordinal="19" data-source="inlineLink" data-type="internalLink" href="https://www.thebalance.com/opec-oil-embargo-causes-and-effects-of-the-crisis-3305806" style="background-image: linear-gradient(rgb(7, 131, 171), rgb(7, 131, 171)); background-position: 0px 100%; background-repeat: repeat-x; background-size: 1px 1px; box-sizing: border-box; color: #222222; outline: 0px; overflow-wrap: break-word; text-decoration-line: none; text-shadow: rgb(255, 255, 255) 0.03em 0px, rgb(255, 255, 255) -0.03em 0px, rgb(255, 255, 255) 0px 0.03em, rgb(255, 255, 255) 0px -0.03em, rgb(255, 255, 255) 0.06em 0px, rgb(255, 255, 255) -0.06em 0px, rgb(255, 255, 255) 0.09em 0px, rgb(255, 255, 255) -0.09em 0px, rgb(255, 255, 255) 0.12em 0px, rgb(255, 255, 255) -0.12em 0px, rgb(255, 255, 255) 0.15em 0px, rgb(255, 255, 255) -0.15em 0px, rgb(255, 255, 255) 0.03em 0.075em, rgb(255, 255, 255) -0.03em 0.075em, rgb(255, 255, 255) 0.06em 0.075em, rgb(255, 255, 255) -0.06em 0.075em, rgb(255, 255, 255) 0.09em 0.075em, rgb(255, 255, 255) -0.09em 0.075em, rgb(255, 255, 255) 0.12em 0.075em, rgb(255, 255, 255) -0.12em 0.075em, rgb(255, 255, 255) 0.15em 0.075em, rgb(255, 255, 255) -0.15em 0.075em; transition: all 0.15s ease-in-out;">OPEC embargo</a> created inflation in October.</span></td></tr>
<tr style="box-sizing: border-box;"><th colspan="3" style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">1974: GDP = -0.5%, Unemployment = 7.2%, Inflation = 12.3% </span></th></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">Feb</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">9%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: black; font-size: x-small;">Jul</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: black; font-size: x-small;">13%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: black; font-size: x-small;">Raised from March to mid-July.</span></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">Dec</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">8.0%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">Lowered gradually from July to December.</span></td></tr>
<tr style="box-sizing: border-box;"><th colspan="3" style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">1975: GDP = -0.2%, Unemployment = 8.2%, Inflation = 6.9%</span></th></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">Jan</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">6.5%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">Lowered four times in January.</span></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">May</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">5.0%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;"><span style="color: red;">Lowered five times in five months</span>.</span></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">Sep</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">6.5%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">Raised from June through September.</span></td></tr>
<tr style="box-sizing: border-box;"><th colspan="3" style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">1976: GDP = 5.4%, Unemployment = 7.8%%, Inflation = 4.9%</span></th></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">Jan</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">4.75%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">Lowered from October through January.</span></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Apr</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">5.5%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Raised in April and May.</span></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">Nov</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">4.75%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">Lowered from July - November.</span></td></tr>
<tr style="box-sizing: border-box;"><th colspan="3" style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">1977: GDP = 4.6%, Unemployment = 6.4%, Inflation = 6.7%</span></th></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">Aug</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">6.0%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">Raised from December through August</span></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">Oct</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">6.5%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">Raised again in September and October.</span></td></tr>
<tr style="box-sizing: border-box;"><th colspan="3" style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Fed Chair William Miller (March 1978 - August 1979)</span></th></tr>
<tr style="box-sizing: border-box;"><th colspan="3" style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">1978: GDP = 5.6%, Unemployment = 6.0%, Inflation = 9.0%</span></th></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">Jan</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">6.75%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Dec</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">10.0%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Raised each month from April through December.</span></td></tr>
<tr style="box-sizing: border-box;"><th colspan="3" style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;"><strong style="box-sizing: border-box;">Fed Chair </strong><a data-component="link" data-ordinal="20" data-source="inlineLink" data-type="internalLink" href="https://www.thebalance.com/who-is-paul-volcker-3306157" style="background-image: linear-gradient(rgb(7, 131, 171), rgb(7, 131, 171)); background-position: 0px 100%; background-repeat: repeat-x; background-size: 1px 1px; box-sizing: border-box; color: #222222; outline: 0px; overflow-wrap: break-word; text-decoration-line: none; text-shadow: rgb(255, 255, 255) 0.03em 0px, rgb(255, 255, 255) -0.03em 0px, rgb(255, 255, 255) 0px 0.03em, rgb(255, 255, 255) 0px -0.03em, rgb(255, 255, 255) 0.06em 0px, rgb(255, 255, 255) -0.06em 0px, rgb(255, 255, 255) 0.09em 0px, rgb(255, 255, 255) -0.09em 0px, rgb(255, 255, 255) 0.12em 0px, rgb(255, 255, 255) -0.12em 0px, rgb(255, 255, 255) 0.15em 0px, rgb(255, 255, 255) -0.15em 0px, rgb(255, 255, 255) 0.03em 0.075em, rgb(255, 255, 255) -0.03em 0.075em, rgb(255, 255, 255) 0.06em 0.075em, rgb(255, 255, 255) -0.06em 0.075em, rgb(255, 255, 255) 0.09em 0.075em, rgb(255, 255, 255) -0.09em 0.075em, rgb(255, 255, 255) 0.12em 0.075em, rgb(255, 255, 255) -0.12em 0.075em, rgb(255, 255, 255) 0.15em 0.075em, rgb(255, 255, 255) -0.15em 0.075em; transition: all 0.15s ease-in-out;">Paul Volcker</a> (August 1979 - August, 1987)</span></th></tr>
<tr style="box-sizing: border-box;"><th colspan="3" style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">1979: GDP = 3.2%, Unemployment = 6.0%, Inflation = 13.3% </span></th></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">Apr</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">10.25%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Oct</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">15.5%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Raised rates 4 points.</span></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">Dec</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">12.0%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">Gradual decline through the month.</span></td></tr>
<tr style="box-sizing: border-box;"><th colspan="3" style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">1980: GDP = -0.2%, Unemployment = 7.2%, Inflation = 12.5%</span></th></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Jan</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">14.0%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Increased rapidly that month.</span></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Mar</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">20.0%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Raised rates in February and March.</span></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">Jun</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">8.5%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">Lowered to 9.5% in May and 8.5% in June. </span></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">Sep</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">12.0%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">Rates increased to 10.0% in August and 12.0% in September</span></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Dec</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">20.0%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Raised steadily until mid-December.</span></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Dec 29</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">18.0%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Lowered two points.</span></td></tr>
<tr style="box-sizing: border-box;"><th colspan="3" style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">1981: GDP = 2.6%, Unemployment = 8.5%, Inflation = 8.9%</span></th></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Jan</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">20.0%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;"><a data-component="link" data-ordinal="21" data-source="inlineLink" data-type="internalLink" href="https://www.thebalance.com/president-ronald-reagan-s-economic-policies-3305568" style="background-image: linear-gradient(rgb(7, 131, 171), rgb(7, 131, 171)); background-position: 0px 100%; background-repeat: repeat-x; background-size: 1px 1px; box-sizing: border-box; color: #222222; outline: 0px; overflow-wrap: break-word; text-decoration-line: none; text-shadow: rgb(255, 255, 255) 0.03em 0px, rgb(255, 255, 255) -0.03em 0px, rgb(255, 255, 255) 0px 0.03em, rgb(255, 255, 255) 0px -0.03em, rgb(255, 255, 255) 0.06em 0px, rgb(255, 255, 255) -0.06em 0px, rgb(255, 255, 255) 0.09em 0px, rgb(255, 255, 255) -0.09em 0px, rgb(255, 255, 255) 0.12em 0px, rgb(255, 255, 255) -0.12em 0px, rgb(255, 255, 255) 0.15em 0px, rgb(255, 255, 255) -0.15em 0px, rgb(255, 255, 255) 0.03em 0.075em, rgb(255, 255, 255) -0.03em 0.075em, rgb(255, 255, 255) 0.06em 0.075em, rgb(255, 255, 255) -0.06em 0.075em, rgb(255, 255, 255) 0.09em 0.075em, rgb(255, 255, 255) -0.09em 0.075em, rgb(255, 255, 255) 0.12em 0.075em, rgb(255, 255, 255) -0.12em 0.075em, rgb(255, 255, 255) 0.15em 0.075em, rgb(255, 255, 255) -0.15em 0.075em; transition: all 0.15s ease-in-out;">Reagan</a> took office. Volcker raised rates again.</span></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Apr</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">16.0%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Lowered 4 points.</span></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">May</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">20.0%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Raised 4 points.</span></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Dec</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">12%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Lowered 8 points.</span></td></tr>
<tr style="box-sizing: border-box;"><th colspan="3" style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">1982: GDP = -1.9%, Unemployment = 10.8%, Inflation = 3.8%</span></th></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Apr</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">15.0%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Raised 3 points.</span></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Dec</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">8.5%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Lowered nine times over nine months.</span></td></tr>
<tr style="box-sizing: border-box;"><th colspan="3" style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">1983: GDP = 4.6%, Unemployment = 8.3%, Inflation = 3.8%</span></th></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Aug</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">9.66%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Raised from May to August.</span></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Oct</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">9.25%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Lowered from August to October</span></td></tr>
<tr style="box-sizing: border-box;"><th colspan="3" style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">1984: GDP = 7.3%, Unemployment = 7.3%, Inflation = 3.9%</span></th></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Aug</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">11.75%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Raised from March to August.</span></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Dec</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">8.25%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Lowered from September to December.</span></td></tr>
<tr style="box-sizing: border-box;"><th colspan="3" style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">1985: GDP = 4.2%, Unemployment = 7.0%, Inflation = 3.8%</span></th></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Mar</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">9.0%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Raised from February to mid-March.</span></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Dec</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">7.75%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Lowered from April to December.</span></td></tr>
<tr style="box-sizing: border-box;"><th colspan="3" style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">1986: GDP = 3.5%, Unemployment = 6.6%, Inflation = 1.1%</span></th></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Aug</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">5.66%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Lowered from March to August.</span></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Dec</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">6.0%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"></td></tr>
<tr style="box-sizing: border-box;"><th colspan="3" style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;"><strong style="box-sizing: border-box;">Fed Chair Alan </strong><strong style="box-sizing: border-box;">Greenspan (August 1987 - January 2006)</strong></span></th></tr>
<tr style="box-sizing: border-box;"><th colspan="3" style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">1987: GDP = 3.5%, Unemployment = 5.7%, Inflation = 4.4% </span></th></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Sep</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">7.25%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Raised rates from April to September.</span></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Nov</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">6.75%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Lowered after October 19 stock market crash.</span></td></tr>
<tr style="box-sizing: border-box;"><th colspan="3" style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">1988: GDP = 4.2%, Unemployment = 5.3%, Inflation = 4.4%</span></th></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Feb</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">6.5%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Lowered in January and February.</span></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Dec</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">9.75%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Raised rates to fight inflation.</span></td></tr>
<tr style="box-sizing: border-box;"><th colspan="3" style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">1989: GDP = 3.7%, Unemployment = 5.4%, Inflation = 4.6%</span></th></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Dec</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">8.25%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;"><a data-component="link" data-ordinal="22" data-source="inlineLink" data-type="internalLink" href="https://www.thebalance.com/savings-and-loans-crisis-causes-cost-3306035" style="background-image: linear-gradient(rgb(7, 131, 171), rgb(7, 131, 171)); background-position: 0px 100%; background-repeat: repeat-x; background-size: 1px 1px; box-sizing: border-box; color: #222222; outline: 0px; overflow-wrap: break-word; text-decoration-line: none; text-shadow: rgb(255, 255, 255) 0.03em 0px, rgb(255, 255, 255) -0.03em 0px, rgb(255, 255, 255) 0px 0.03em, rgb(255, 255, 255) 0px -0.03em, rgb(255, 255, 255) 0.06em 0px, rgb(255, 255, 255) -0.06em 0px, rgb(255, 255, 255) 0.09em 0px, rgb(255, 255, 255) -0.09em 0px, rgb(255, 255, 255) 0.12em 0px, rgb(255, 255, 255) -0.12em 0px, rgb(255, 255, 255) 0.15em 0px, rgb(255, 255, 255) -0.15em 0px, rgb(255, 255, 255) 0.03em 0.075em, rgb(255, 255, 255) -0.03em 0.075em, rgb(255, 255, 255) 0.06em 0.075em, rgb(255, 255, 255) -0.06em 0.075em, rgb(255, 255, 255) 0.09em 0.075em, rgb(255, 255, 255) -0.09em 0.075em, rgb(255, 255, 255) 0.12em 0.075em, rgb(255, 255, 255) -0.12em 0.075em, rgb(255, 255, 255) 0.15em 0.075em, rgb(255, 255, 255) -0.15em 0.075em; transition: all 0.15s ease-in-out;">S&L crisis</a>. Fed lowered rates.</span></td></tr>
<tr style="box-sizing: border-box;"><th colspan="3" style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">1990: GDP = 1.9%, Unemployment = 6.3%, Inflation = 6.1%</span></th></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Dec</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">7.0%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Recession began in July.</span></td></tr>
<tr style="box-sizing: border-box;"><th colspan="3" style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">1991: GDP = -0.1%, Unemployment = 7.3%, Inflation = 3.1%</span></th></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Dec</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">4.0%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Recession ended in March.</span></td></tr>
<tr style="box-sizing: border-box;"><th colspan="3" style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">1992: GDP = 3.6%, Unemployment = 7.4%, Inflation = 2.9%</span></th></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Apr 9</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">3.75%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Expansion.</span></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Jul 2</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">3.25%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">Sep 4</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">3.0%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;"><a data-component="link" data-ordinal="23" data-source="inlineLink" data-type="internalLink" href="https://www.thebalance.com/president-bill-clinton-s-economic-policies-3305559" style="background-image: linear-gradient(rgb(7, 131, 171), rgb(7, 131, 171)); background-position: 0px 100%; background-repeat: repeat-x; background-size: 1px 1px; box-sizing: border-box; outline: 0px; overflow-wrap: break-word; text-decoration-line: none; text-shadow: rgb(255, 255, 255) 0.03em 0px, rgb(255, 255, 255) -0.03em 0px, rgb(255, 255, 255) 0px 0.03em, rgb(255, 255, 255) 0px -0.03em, rgb(255, 255, 255) 0.06em 0px, rgb(255, 255, 255) -0.06em 0px, rgb(255, 255, 255) 0.09em 0px, rgb(255, 255, 255) -0.09em 0px, rgb(255, 255, 255) 0.12em 0px, rgb(255, 255, 255) -0.12em 0px, rgb(255, 255, 255) 0.15em 0px, rgb(255, 255, 255) -0.15em 0px, rgb(255, 255, 255) 0.03em 0.075em, rgb(255, 255, 255) -0.03em 0.075em, rgb(255, 255, 255) 0.06em 0.075em, rgb(255, 255, 255) -0.06em 0.075em, rgb(255, 255, 255) 0.09em 0.075em, rgb(255, 255, 255) -0.09em 0.075em, rgb(255, 255, 255) 0.12em 0.075em, rgb(255, 255, 255) -0.12em 0.075em, rgb(255, 255, 255) 0.15em 0.075em, rgb(255, 255, 255) -0.15em 0.075em; transition: all 0.15s ease-in-out;">Clinton</a> took office in 1993. Fed made no changes.</span></td></tr>
<tr style="box-sizing: border-box;"><th colspan="3" style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">1994: GDP = 4.0%, Unemployment = 5.5%, Inflation = 2.7%</span></th></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Feb 4</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">3.25%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Mar 22</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">3.5%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Apr 18</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">3.75%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">May 17</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">4.25%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Aug 16</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">4.75%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Nov 15</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">5.5%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Raised rates.</span></td></tr>
<tr style="box-sizing: border-box;"><th colspan="3" style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">1995: GDP = 2.7%, Unemployment = 5.6%, Inflation = 2.5%</span></th></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Feb 1</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">6.0%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Raised rates.</span></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Jul 6</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">5.75%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Lowered rates.</span></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Dec</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">5.5%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"></td></tr>
<tr style="box-sizing: border-box;"><th colspan="3" style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">1996: GDP = 3.8%, Unemployment = 5.4%, Inflation = 3.3% </span></th></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Jan 31</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">5.25%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Kept rates low despite inflation.</span></td></tr>
<tr style="box-sizing: border-box;"><th colspan="3" style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">1997: GDP = 4.5%, Unemployment = 4.7%, Inflation = 1.7% </span></th></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Mar 25</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">5.5%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"></td></tr>
<tr style="box-sizing: border-box;"><th colspan="3" style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">1998: GDP = 4.5%, Unemployment = 6%, Inflation = 1.6%</span></th></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Sep 29</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">5.25%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;"><a data-component="link" data-ordinal="24" data-source="inlineLink" data-type="internalLink" href="https://www.thebalance.com/long-term-capital-crisis-3306240" style="background-image: linear-gradient(rgb(7, 131, 171), rgb(7, 131, 171)); background-position: 0px 100%; background-repeat: repeat-x; background-size: 1px 1px; box-sizing: border-box; color: #222222; outline: 0px; overflow-wrap: break-word; text-decoration-line: none; text-shadow: rgb(255, 255, 255) 0.03em 0px, rgb(255, 255, 255) -0.03em 0px, rgb(255, 255, 255) 0px 0.03em, rgb(255, 255, 255) 0px -0.03em, rgb(255, 255, 255) 0.06em 0px, rgb(255, 255, 255) -0.06em 0px, rgb(255, 255, 255) 0.09em 0px, rgb(255, 255, 255) -0.09em 0px, rgb(255, 255, 255) 0.12em 0px, rgb(255, 255, 255) -0.12em 0px, rgb(255, 255, 255) 0.15em 0px, rgb(255, 255, 255) -0.15em 0px, rgb(255, 255, 255) 0.03em 0.075em, rgb(255, 255, 255) -0.03em 0.075em, rgb(255, 255, 255) 0.06em 0.075em, rgb(255, 255, 255) -0.06em 0.075em, rgb(255, 255, 255) 0.09em 0.075em, rgb(255, 255, 255) -0.09em 0.075em, rgb(255, 255, 255) 0.12em 0.075em, rgb(255, 255, 255) -0.12em 0.075em, rgb(255, 255, 255) 0.15em 0.075em, rgb(255, 255, 255) -0.15em 0.075em; transition: all 0.15s ease-in-out;">LTCM crisis</a>.</span></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Oct 15</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">5.0%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Nov</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">4.75%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"></td></tr>
<tr style="box-sizing: border-box;"><th colspan="3" style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">1999: GDP = 4.7%, Unemployment = 6%, Inflation = 2.7%</span></th></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Jun 30</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">5.0%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Raised rates</span></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Aug 24</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">5.25%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Nov 16</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">5.5%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"></td></tr>
<tr style="box-sizing: border-box;"><th colspan="3" style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">2000: GDP = 4.1%, Unemployment = 6%, Inflation = 3.4%</span></th></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Feb 2</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">5.75%</span></td><td colspan="1" rowspan="3" style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Raised rates despite stock market decline in March.</span></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Mar 21</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">6.0%</span></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">May</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">6.5%</span></td></tr>
<tr style="box-sizing: border-box;"><th colspan="3" style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">2001: GDP = 1.0%, Unemployment = 6%, Inflation = 1.6% </span></th></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Jan 3</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">6.0%</span></td><td colspan="1" rowspan="2" style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;"><a data-component="link" data-ordinal="25" data-source="inlineLink" data-type="internalLink" href="https://www.thebalance.com/bush-administration-economic-policies-3305556" style="background-image: linear-gradient(rgb(7, 131, 171), rgb(7, 131, 171)); background-position: 0px 100%; background-repeat: repeat-x; background-size: 1px 1px; box-sizing: border-box; color: #222222; outline: 0px; overflow-wrap: break-word; text-decoration-line: none; text-shadow: rgb(255, 255, 255) 0.03em 0px, rgb(255, 255, 255) -0.03em 0px, rgb(255, 255, 255) 0px 0.03em, rgb(255, 255, 255) 0px -0.03em, rgb(255, 255, 255) 0.06em 0px, rgb(255, 255, 255) -0.06em 0px, rgb(255, 255, 255) 0.09em 0px, rgb(255, 255, 255) -0.09em 0px, rgb(255, 255, 255) 0.12em 0px, rgb(255, 255, 255) -0.12em 0px, rgb(255, 255, 255) 0.15em 0px, rgb(255, 255, 255) -0.15em 0px, rgb(255, 255, 255) 0.03em 0.075em, rgb(255, 255, 255) -0.03em 0.075em, rgb(255, 255, 255) 0.06em 0.075em, rgb(255, 255, 255) -0.06em 0.075em, rgb(255, 255, 255) 0.09em 0.075em, rgb(255, 255, 255) -0.09em 0.075em, rgb(255, 255, 255) 0.12em 0.075em, rgb(255, 255, 255) -0.12em 0.075em, rgb(255, 255, 255) 0.15em 0.075em, rgb(255, 255, 255) -0.15em 0.075em; transition: all 0.15s ease-in-out;">Bush</a> took office. </span></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Jan 31</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">5.5%</span></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Mar 20</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">5.0%</span></td><td colspan="1" rowspan="3" style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Recession began. Fed lowered rates to fight it.</span></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Apr 18</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">4.5%</span></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">May 15</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">4.0%</span></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Jun 27</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">3.75%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;"><a data-component="link" data-ordinal="26" data-source="inlineLink" data-type="internalLink" href="https://www.thebalance.com/economic-growth-and-tax-relief-reconciliation-act-3305764" style="background-image: linear-gradient(rgb(7, 131, 171), rgb(7, 131, 171)); background-position: 0px 100%; background-repeat: repeat-x; background-size: 1px 1px; box-sizing: border-box; color: #222222; outline: 0px; overflow-wrap: break-word; text-decoration-line: none; text-shadow: rgb(255, 255, 255) 0.03em 0px, rgb(255, 255, 255) -0.03em 0px, rgb(255, 255, 255) 0px 0.03em, rgb(255, 255, 255) 0px -0.03em, rgb(255, 255, 255) 0.06em 0px, rgb(255, 255, 255) -0.06em 0px, rgb(255, 255, 255) 0.09em 0px, rgb(255, 255, 255) -0.09em 0px, rgb(255, 255, 255) 0.12em 0px, rgb(255, 255, 255) -0.12em 0px, rgb(255, 255, 255) 0.15em 0px, rgb(255, 255, 255) -0.15em 0px, rgb(255, 255, 255) 0.03em 0.075em, rgb(255, 255, 255) -0.03em 0.075em, rgb(255, 255, 255) 0.06em 0.075em, rgb(255, 255, 255) -0.06em 0.075em, rgb(255, 255, 255) 0.09em 0.075em, rgb(255, 255, 255) -0.09em 0.075em, rgb(255, 255, 255) 0.12em 0.075em, rgb(255, 255, 255) -0.12em 0.075em, rgb(255, 255, 255) 0.15em 0.075em, rgb(255, 255, 255) -0.15em 0.075em; transition: all 0.15s ease-in-out;">EGTTRA</a> tax rebate enacted.</span></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Aug 21</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">3.5%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Sep 17</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">3.0%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;"><a data-component="link" data-ordinal="27" data-source="inlineLink" data-type="internalLink" href="https://www.thebalance.com/how-the-9-11-attacks-still-affect-the-economy-today-3305536" style="background-image: linear-gradient(rgb(7, 131, 171), rgb(7, 131, 171)); background-position: 0px 100%; background-repeat: repeat-x; background-size: 1px 1px; box-sizing: border-box; color: #222222; outline: 0px; overflow-wrap: break-word; text-decoration-line: none; text-shadow: rgb(255, 255, 255) 0.03em 0px, rgb(255, 255, 255) -0.03em 0px, rgb(255, 255, 255) 0px 0.03em, rgb(255, 255, 255) 0px -0.03em, rgb(255, 255, 255) 0.06em 0px, rgb(255, 255, 255) -0.06em 0px, rgb(255, 255, 255) 0.09em 0px, rgb(255, 255, 255) -0.09em 0px, rgb(255, 255, 255) 0.12em 0px, rgb(255, 255, 255) -0.12em 0px, rgb(255, 255, 255) 0.15em 0px, rgb(255, 255, 255) -0.15em 0px, rgb(255, 255, 255) 0.03em 0.075em, rgb(255, 255, 255) -0.03em 0.075em, rgb(255, 255, 255) 0.06em 0.075em, rgb(255, 255, 255) -0.06em 0.075em, rgb(255, 255, 255) 0.09em 0.075em, rgb(255, 255, 255) -0.09em 0.075em, rgb(255, 255, 255) 0.12em 0.075em, rgb(255, 255, 255) -0.12em 0.075em, rgb(255, 255, 255) 0.15em 0.075em, rgb(255, 255, 255) -0.15em 0.075em; transition: all 0.15s ease-in-out;">9/11 attacks</a>.</span></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Oct 2</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">2.5%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><a data-component="link" data-ordinal="28" data-source="inlineLink" data-type="internalLink" href="https://www.thebalance.com/cost-of-afghanistan-war-timeline-economic-impact-4122493" style="background-image: linear-gradient(rgb(7, 131, 171), rgb(7, 131, 171)); background-position: 0px 100%; background-repeat: repeat-x; background-size: 1px 1px; box-sizing: border-box; color: #222222; outline: 0px; overflow-wrap: break-word; text-decoration-line: none; text-shadow: rgb(255, 255, 255) 0.03em 0px, rgb(255, 255, 255) -0.03em 0px, rgb(255, 255, 255) 0px 0.03em, rgb(255, 255, 255) 0px -0.03em, rgb(255, 255, 255) 0.06em 0px, rgb(255, 255, 255) -0.06em 0px, rgb(255, 255, 255) 0.09em 0px, rgb(255, 255, 255) -0.09em 0px, rgb(255, 255, 255) 0.12em 0px, rgb(255, 255, 255) -0.12em 0px, rgb(255, 255, 255) 0.15em 0px, rgb(255, 255, 255) -0.15em 0px, rgb(255, 255, 255) 0.03em 0.075em, rgb(255, 255, 255) -0.03em 0.075em, rgb(255, 255, 255) 0.06em 0.075em, rgb(255, 255, 255) -0.06em 0.075em, rgb(255, 255, 255) 0.09em 0.075em, rgb(255, 255, 255) -0.09em 0.075em, rgb(255, 255, 255) 0.12em 0.075em, rgb(255, 255, 255) -0.12em 0.075em, rgb(255, 255, 255) 0.15em 0.075em, rgb(255, 255, 255) -0.15em 0.075em; transition: all 0.15s ease-in-out;"><span style="font-size: x-small;">Afghanistan War.</span></a></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Nov 6</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">2.0%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">Dec 11</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">1.75%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"></td></tr>
<tr style="box-sizing: border-box;"><th colspan="3" style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">2002: GDP = 1.8%, Unemployment = 6%, Inflation = 2.4%</span></th></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Nov 6</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">1.25%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"></td></tr>
<tr style="box-sizing: border-box;"><th colspan="3" style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">2003: GDP = 2.8%, Unemployment = 6%, Inflation = 1.9%</span></th></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Jun 25</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">1.00%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;"><a data-component="link" data-ordinal="29" data-source="inlineLink" data-type="internalLink" href="https://www.thebalance.com/jobs-and-growth-tax-relief-reconciliation-act-2003-3305769" style="background-image: linear-gradient(rgb(7, 131, 171), rgb(7, 131, 171)); background-position: 0px 100%; background-repeat: repeat-x; background-size: 1px 1px; box-sizing: border-box; color: #222222; outline: 0px; overflow-wrap: break-word; text-decoration-line: none; text-shadow: rgb(255, 255, 255) 0.03em 0px, rgb(255, 255, 255) -0.03em 0px, rgb(255, 255, 255) 0px 0.03em, rgb(255, 255, 255) 0px -0.03em, rgb(255, 255, 255) 0.06em 0px, rgb(255, 255, 255) -0.06em 0px, rgb(255, 255, 255) 0.09em 0px, rgb(255, 255, 255) -0.09em 0px, rgb(255, 255, 255) 0.12em 0px, rgb(255, 255, 255) -0.12em 0px, rgb(255, 255, 255) 0.15em 0px, rgb(255, 255, 255) -0.15em 0px, rgb(255, 255, 255) 0.03em 0.075em, rgb(255, 255, 255) -0.03em 0.075em, rgb(255, 255, 255) 0.06em 0.075em, rgb(255, 255, 255) -0.06em 0.075em, rgb(255, 255, 255) 0.09em 0.075em, rgb(255, 255, 255) -0.09em 0.075em, rgb(255, 255, 255) 0.12em 0.075em, rgb(255, 255, 255) -0.12em 0.075em, rgb(255, 255, 255) 0.15em 0.075em, rgb(255, 255, 255) -0.15em 0.075em; transition: all 0.15s ease-in-out;">JGTRRA</a> tax cuts enacted.</span></td></tr>
<tr style="box-sizing: border-box;"><th colspan="3" style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">2004: GDP = 3.8%, Unemployment = 6%, Inflation = 3.3%</span></th></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">Jun 30</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">1.25%</span></td><td colspan="1" rowspan="4" style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">Low rates pushed <a data-component="link" data-ordinal="30" data-source="inlineLink" data-type="internalLink" href="https://www.thebalance.com/interest-only-loan-types-pros-and-cons-3305936" style="background-image: linear-gradient(rgb(7, 131, 171), rgb(7, 131, 171)); background-position: 0px 100%; background-repeat: repeat-x; background-size: 1px 1px; box-sizing: border-box; outline: 0px; overflow-wrap: break-word; text-decoration-line: none; text-shadow: rgb(255, 255, 255) 0.03em 0px, rgb(255, 255, 255) -0.03em 0px, rgb(255, 255, 255) 0px 0.03em, rgb(255, 255, 255) 0px -0.03em, rgb(255, 255, 255) 0.06em 0px, rgb(255, 255, 255) -0.06em 0px, rgb(255, 255, 255) 0.09em 0px, rgb(255, 255, 255) -0.09em 0px, rgb(255, 255, 255) 0.12em 0px, rgb(255, 255, 255) -0.12em 0px, rgb(255, 255, 255) 0.15em 0px, rgb(255, 255, 255) -0.15em 0px, rgb(255, 255, 255) 0.03em 0.075em, rgb(255, 255, 255) -0.03em 0.075em, rgb(255, 255, 255) 0.06em 0.075em, rgb(255, 255, 255) -0.06em 0.075em, rgb(255, 255, 255) 0.09em 0.075em, rgb(255, 255, 255) -0.09em 0.075em, rgb(255, 255, 255) 0.12em 0.075em, rgb(255, 255, 255) -0.12em 0.075em, rgb(255, 255, 255) 0.15em 0.075em, rgb(255, 255, 255) -0.15em 0.075em; transition: all 0.15s ease-in-out;">interest-only loans</a>. Helped <a data-component="link" data-ordinal="31" data-source="inlineLink" data-type="internalLink" href="https://www.thebalance.com/what-caused-the-subprime-mortgage-crisis-3305696" style="background-image: linear-gradient(rgb(7, 131, 171), rgb(7, 131, 171)); background-position: 0px 100%; background-repeat: repeat-x; background-size: 1px 1px; box-sizing: border-box; outline: 0px; overflow-wrap: break-word; text-decoration-line: none; text-shadow: rgb(255, 255, 255) 0.03em 0px, rgb(255, 255, 255) -0.03em 0px, rgb(255, 255, 255) 0px 0.03em, rgb(255, 255, 255) 0px -0.03em, rgb(255, 255, 255) 0.06em 0px, rgb(255, 255, 255) -0.06em 0px, rgb(255, 255, 255) 0.09em 0px, rgb(255, 255, 255) -0.09em 0px, rgb(255, 255, 255) 0.12em 0px, rgb(255, 255, 255) -0.12em 0px, rgb(255, 255, 255) 0.15em 0px, rgb(255, 255, 255) -0.15em 0px, rgb(255, 255, 255) 0.03em 0.075em, rgb(255, 255, 255) -0.03em 0.075em, rgb(255, 255, 255) 0.06em 0.075em, rgb(255, 255, 255) -0.06em 0.075em, rgb(255, 255, 255) 0.09em 0.075em, rgb(255, 255, 255) -0.09em 0.075em, rgb(255, 255, 255) 0.12em 0.075em, rgb(255, 255, 255) -0.12em 0.075em, rgb(255, 255, 255) 0.15em 0.075em, rgb(255, 255, 255) -0.15em 0.075em; transition: all 0.15s ease-in-out;">cause Subprime Mortgage Crisis</a>.</span></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">Aug 10</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">1.5%</span></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">Sep 21</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">1.75%</span></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">Nov 10</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">2.0%</span></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">Dec 14</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">2.25%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"></td></tr>
<tr style="box-sizing: border-box;"><th colspan="3" style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">2005: GDP = 3.3%, Unemployment = 6%, Inflation = 3.4%</span></th></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">Feb 2</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">2.5%</span></td><td colspan="1" rowspan="4" style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">Borrowers could not afford mortgages when rates reset in 3rd year. </span></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">Mar 22</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">2.75%</span></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">May 3</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">3.0%</span></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">Jun 30</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">3.25%</span></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">Aug 9</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">3.5%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Sep 20</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">3.75%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Nov 1</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">4.0%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Dec 13</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">4.25%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"></td></tr>
<tr style="box-sizing: border-box;"><th colspan="3" style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;"><strong style="box-sizing: border-box;">Fed Chair Ben </strong><a data-component="link" data-ordinal="32" data-source="inlineLink" data-type="internalLink" href="https://www.thebalance.com/federal-reserve-chairman-ben-bernanke-3306152" style="background-image: linear-gradient(rgb(7, 131, 171), rgb(7, 131, 171)); background-position: 0px 100%; background-repeat: repeat-x; background-size: 1px 1px; box-sizing: border-box; color: #222222; outline: 0px; overflow-wrap: break-word; text-decoration-line: none; text-shadow: rgb(255, 255, 255) 0.03em 0px, rgb(255, 255, 255) -0.03em 0px, rgb(255, 255, 255) 0px 0.03em, rgb(255, 255, 255) 0px -0.03em, rgb(255, 255, 255) 0.06em 0px, rgb(255, 255, 255) -0.06em 0px, rgb(255, 255, 255) 0.09em 0px, rgb(255, 255, 255) -0.09em 0px, rgb(255, 255, 255) 0.12em 0px, rgb(255, 255, 255) -0.12em 0px, rgb(255, 255, 255) 0.15em 0px, rgb(255, 255, 255) -0.15em 0px, rgb(255, 255, 255) 0.03em 0.075em, rgb(255, 255, 255) -0.03em 0.075em, rgb(255, 255, 255) 0.06em 0.075em, rgb(255, 255, 255) -0.06em 0.075em, rgb(255, 255, 255) 0.09em 0.075em, rgb(255, 255, 255) -0.09em 0.075em, rgb(255, 255, 255) 0.12em 0.075em, rgb(255, 255, 255) -0.12em 0.075em, rgb(255, 255, 255) 0.15em 0.075em, rgb(255, 255, 255) -0.15em 0.075em; transition: all 0.15s ease-in-out;">Bernanke</a> (February 2006 - January 2014)</span></th></tr>
<tr style="box-sizing: border-box;"><th colspan="3" style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">2006: GDP = 2.7%, Unemployment = 6%, Inflation = 2.5% </span></th></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Jan 31</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">4.5%</span></td><td colspan="1" rowspan="4" style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Raised to cool housing market bubble. More homeowners default.</span></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Mar 28</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">4.75%</span></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">May 10</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">5.0%</span></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Jun 29</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">5.25%</span></td></tr>
<tr style="box-sizing: border-box;"><th colspan="3" style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">2007: GDP = 1.8%, Unemployment = 6%, Inflation = 4.1%</span></th></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Sep 18</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">4.75%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Home sales fell.</span></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Oct 31</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">4.5%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Dec 11</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">4.25%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;"><a data-component="link" data-ordinal="33" data-source="inlineLink" data-type="internalLink" href="https://www.thebalance.com/libor-rate-history-compare-to-the-fed-funds-rate-history-3306123" style="background-image: linear-gradient(rgb(7, 131, 171), rgb(7, 131, 171)); background-position: 0px 100%; background-repeat: repeat-x; background-size: 1px 1px; box-sizing: border-box; color: #222222; outline: 0px; overflow-wrap: break-word; text-decoration-line: none; text-shadow: rgb(255, 255, 255) 0.03em 0px, rgb(255, 255, 255) -0.03em 0px, rgb(255, 255, 255) 0px 0.03em, rgb(255, 255, 255) 0px -0.03em, rgb(255, 255, 255) 0.06em 0px, rgb(255, 255, 255) -0.06em 0px, rgb(255, 255, 255) 0.09em 0px, rgb(255, 255, 255) -0.09em 0px, rgb(255, 255, 255) 0.12em 0px, rgb(255, 255, 255) -0.12em 0px, rgb(255, 255, 255) 0.15em 0px, rgb(255, 255, 255) -0.15em 0px, rgb(255, 255, 255) 0.03em 0.075em, rgb(255, 255, 255) -0.03em 0.075em, rgb(255, 255, 255) 0.06em 0.075em, rgb(255, 255, 255) -0.06em 0.075em, rgb(255, 255, 255) 0.09em 0.075em, rgb(255, 255, 255) -0.09em 0.075em, rgb(255, 255, 255) 0.12em 0.075em, rgb(255, 255, 255) -0.12em 0.075em, rgb(255, 255, 255) 0.15em 0.075em, rgb(255, 255, 255) -0.15em 0.075em; transition: all 0.15s ease-in-out;">LIBOR rose</a>.</span></td></tr>
<tr style="box-sizing: border-box;"><th colspan="3" style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">2008: GDP = -0.3%, Unemployment = 6%, Inflation = 0.1%</span></th></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Jan 22</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">3.5%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Jan 30 </span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">3.0%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;"><a data-component="link" data-ordinal="34" data-source="inlineLink" data-type="internalLink" href="https://www.thebalance.com/bush-economic-stimulus-package-3305782" style="background-image: linear-gradient(rgb(7, 131, 171), rgb(7, 131, 171)); background-position: 0px 100%; background-repeat: repeat-x; background-size: 1px 1px; box-sizing: border-box; color: #222222; outline: 0px; overflow-wrap: break-word; text-decoration-line: none; text-shadow: rgb(255, 255, 255) 0.03em 0px, rgb(255, 255, 255) -0.03em 0px, rgb(255, 255, 255) 0px 0.03em, rgb(255, 255, 255) 0px -0.03em, rgb(255, 255, 255) 0.06em 0px, rgb(255, 255, 255) -0.06em 0px, rgb(255, 255, 255) 0.09em 0px, rgb(255, 255, 255) -0.09em 0px, rgb(255, 255, 255) 0.12em 0px, rgb(255, 255, 255) -0.12em 0px, rgb(255, 255, 255) 0.15em 0px, rgb(255, 255, 255) -0.15em 0px, rgb(255, 255, 255) 0.03em 0.075em, rgb(255, 255, 255) -0.03em 0.075em, rgb(255, 255, 255) 0.06em 0.075em, rgb(255, 255, 255) -0.06em 0.075em, rgb(255, 255, 255) 0.09em 0.075em, rgb(255, 255, 255) -0.09em 0.075em, rgb(255, 255, 255) 0.12em 0.075em, rgb(255, 255, 255) -0.12em 0.075em, rgb(255, 255, 255) 0.15em 0.075em, rgb(255, 255, 255) -0.15em 0.075em; transition: all 0.15s ease-in-out;">Tax rebate</a>.</span></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Mar 18</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">2.25%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;"><a data-component="link" data-ordinal="35" data-source="inlineLink" data-type="internalLink" href="https://www.thebalance.com/bearn-stearns-collapse-and-bailout-3305613" style="background-image: linear-gradient(rgb(7, 131, 171), rgb(7, 131, 171)); background-position: 0px 100%; background-repeat: repeat-x; background-size: 1px 1px; box-sizing: border-box; color: #222222; outline: 0px; overflow-wrap: break-word; text-decoration-line: none; text-shadow: rgb(255, 255, 255) 0.03em 0px, rgb(255, 255, 255) -0.03em 0px, rgb(255, 255, 255) 0px 0.03em, rgb(255, 255, 255) 0px -0.03em, rgb(255, 255, 255) 0.06em 0px, rgb(255, 255, 255) -0.06em 0px, rgb(255, 255, 255) 0.09em 0px, rgb(255, 255, 255) -0.09em 0px, rgb(255, 255, 255) 0.12em 0px, rgb(255, 255, 255) -0.12em 0px, rgb(255, 255, 255) 0.15em 0px, rgb(255, 255, 255) -0.15em 0px, rgb(255, 255, 255) 0.03em 0.075em, rgb(255, 255, 255) -0.03em 0.075em, rgb(255, 255, 255) 0.06em 0.075em, rgb(255, 255, 255) -0.06em 0.075em, rgb(255, 255, 255) 0.09em 0.075em, rgb(255, 255, 255) -0.09em 0.075em, rgb(255, 255, 255) 0.12em 0.075em, rgb(255, 255, 255) -0.12em 0.075em, rgb(255, 255, 255) 0.15em 0.075em, rgb(255, 255, 255) -0.15em 0.075em; transition: all 0.15s ease-in-out;">Bear Stearns</a> bailout.</span></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Apr 30</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">2.0%</span></td><td colspan="1" rowspan="3" style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Lehman fails. <a data-component="link" data-ordinal="36" data-source="inlineLink" data-type="internalLink" href="https://www.thebalance.com/tarp-bailout-program-3305895" style="background-image: linear-gradient(rgb(7, 131, 171), rgb(7, 131, 171)); background-position: 0px 100%; background-repeat: repeat-x; background-size: 1px 1px; box-sizing: border-box; color: #222222; outline: 0px; overflow-wrap: break-word; text-decoration-line: none; text-shadow: rgb(255, 255, 255) 0.03em 0px, rgb(255, 255, 255) -0.03em 0px, rgb(255, 255, 255) 0px 0.03em, rgb(255, 255, 255) 0px -0.03em, rgb(255, 255, 255) 0.06em 0px, rgb(255, 255, 255) -0.06em 0px, rgb(255, 255, 255) 0.09em 0px, rgb(255, 255, 255) -0.09em 0px, rgb(255, 255, 255) 0.12em 0px, rgb(255, 255, 255) -0.12em 0px, rgb(255, 255, 255) 0.15em 0px, rgb(255, 255, 255) -0.15em 0px, rgb(255, 255, 255) 0.03em 0.075em, rgb(255, 255, 255) -0.03em 0.075em, rgb(255, 255, 255) 0.06em 0.075em, rgb(255, 255, 255) -0.06em 0.075em, rgb(255, 255, 255) 0.09em 0.075em, rgb(255, 255, 255) -0.09em 0.075em, rgb(255, 255, 255) 0.12em 0.075em, rgb(255, 255, 255) -0.12em 0.075em, rgb(255, 255, 255) 0.15em 0.075em, rgb(255, 255, 255) -0.15em 0.075em; transition: all 0.15s ease-in-out;">Bank bailout</a>approved. <a data-component="link" data-ordinal="37" data-source="inlineLink" data-type="internalLink" href="https://www.thebalance.com/aig-bailout-cost-timeline-bonuses-causes-effects-3305693" style="background-image: linear-gradient(rgb(7, 131, 171), rgb(7, 131, 171)); background-position: 0px 100%; background-repeat: repeat-x; background-size: 1px 1px; box-sizing: border-box; color: #222222; outline: 0px; overflow-wrap: break-word; text-decoration-line: none; text-shadow: rgb(255, 255, 255) 0.03em 0px, rgb(255, 255, 255) -0.03em 0px, rgb(255, 255, 255) 0px 0.03em, rgb(255, 255, 255) 0px -0.03em, rgb(255, 255, 255) 0.06em 0px, rgb(255, 255, 255) -0.06em 0px, rgb(255, 255, 255) 0.09em 0px, rgb(255, 255, 255) -0.09em 0px, rgb(255, 255, 255) 0.12em 0px, rgb(255, 255, 255) -0.12em 0px, rgb(255, 255, 255) 0.15em 0px, rgb(255, 255, 255) -0.15em 0px, rgb(255, 255, 255) 0.03em 0.075em, rgb(255, 255, 255) -0.03em 0.075em, rgb(255, 255, 255) 0.06em 0.075em, rgb(255, 255, 255) -0.06em 0.075em, rgb(255, 255, 255) 0.09em 0.075em, rgb(255, 255, 255) -0.09em 0.075em, rgb(255, 255, 255) 0.12em 0.075em, rgb(255, 255, 255) -0.12em 0.075em, rgb(255, 255, 255) 0.15em 0.075em, rgb(255, 255, 255) -0.15em 0.075em; transition: all 0.15s ease-in-out;">AIG</a> bailout.</span></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Oct 8</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">1.5%</span></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Oct 29</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">1.0%</span></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">Dec 16</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">0.25%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">Effectively zero. The lowest fed funds rate possible.</span></td></tr>
<tr style="box-sizing: border-box;"><th colspan="3" style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;"><strong style="box-sizing: border-box;">Fed Chair </strong><a data-component="link" data-ordinal="38" data-source="inlineLink" data-type="internalLink" href="https://www.thebalance.com/janet-yellen-3305503" style="background-image: linear-gradient(rgb(7, 131, 171), rgb(7, 131, 171)); background-position: 0px 100%; background-repeat: repeat-x; background-size: 1px 1px; box-sizing: border-box; color: #222222; outline: 0px; overflow-wrap: break-word; text-decoration-line: none; text-shadow: rgb(255, 255, 255) 0.03em 0px, rgb(255, 255, 255) -0.03em 0px, rgb(255, 255, 255) 0px 0.03em, rgb(255, 255, 255) 0px -0.03em, rgb(255, 255, 255) 0.06em 0px, rgb(255, 255, 255) -0.06em 0px, rgb(255, 255, 255) 0.09em 0px, rgb(255, 255, 255) -0.09em 0px, rgb(255, 255, 255) 0.12em 0px, rgb(255, 255, 255) -0.12em 0px, rgb(255, 255, 255) 0.15em 0px, rgb(255, 255, 255) -0.15em 0px, rgb(255, 255, 255) 0.03em 0.075em, rgb(255, 255, 255) -0.03em 0.075em, rgb(255, 255, 255) 0.06em 0.075em, rgb(255, 255, 255) -0.06em 0.075em, rgb(255, 255, 255) 0.09em 0.075em, rgb(255, 255, 255) -0.09em 0.075em, rgb(255, 255, 255) 0.12em 0.075em, rgb(255, 255, 255) -0.12em 0.075em, rgb(255, 255, 255) 0.15em 0.075em, rgb(255, 255, 255) -0.15em 0.075em; transition: all 0.15s ease-in-out;">Janet Yellen</a> (February 2014 - January 2018)</span></th></tr>
<tr style="box-sizing: border-box;"><th colspan="3" style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">2015: GDP = 2.6%, Unemployment = 6%, Inflation = 0.7% </span></th></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">Dec 17</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">0.5%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">Growth stabilized.</span></td></tr>
<tr style="box-sizing: border-box;"><th colspan="3" style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">2016: GDP = 3.2%, Unemployment = 4.6%, Inflation = 0.4% (as of December, 19 2016)</span></th></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">Dec 14</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="color: red; font-size: x-small;">0.75%</span></td><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"></td></tr>
<tr style="box-sizing: border-box;"><th colspan="3" style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">2017: <strong style="box-sizing: border-box;">GDP, Unemployment and Inflation TBD</strong></span></th></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Mar 15</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">1.0%</span></td><td colspan="1" rowspan="2" style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;"><a data-component="link" data-ordinal="39" data-source="inlineLink" data-type="internalLink" href="https://www.thebalance.com/us-economic-outlook-3305669" style="background-image: linear-gradient(rgb(7, 131, 171), rgb(7, 131, 171)); background-position: 0px 100%; background-repeat: repeat-x; background-size: 1px 1px; box-sizing: border-box; color: #222222; outline: 0px; overflow-wrap: break-word; text-decoration-line: none; text-shadow: rgb(255, 255, 255) 0.03em 0px, rgb(255, 255, 255) -0.03em 0px, rgb(255, 255, 255) 0px 0.03em, rgb(255, 255, 255) 0px -0.03em, rgb(255, 255, 255) 0.06em 0px, rgb(255, 255, 255) -0.06em 0px, rgb(255, 255, 255) 0.09em 0px, rgb(255, 255, 255) -0.09em 0px, rgb(255, 255, 255) 0.12em 0px, rgb(255, 255, 255) -0.12em 0px, rgb(255, 255, 255) 0.15em 0px, rgb(255, 255, 255) -0.15em 0px, rgb(255, 255, 255) 0.03em 0.075em, rgb(255, 255, 255) -0.03em 0.075em, rgb(255, 255, 255) 0.06em 0.075em, rgb(255, 255, 255) -0.06em 0.075em, rgb(255, 255, 255) 0.09em 0.075em, rgb(255, 255, 255) -0.09em 0.075em, rgb(255, 255, 255) 0.12em 0.075em, rgb(255, 255, 255) -0.12em 0.075em, rgb(255, 255, 255) 0.15em 0.075em, rgb(255, 255, 255) -0.15em 0.075em; transition: all 0.15s ease-in-out;">Fed projects steady growth</a>.</span></td></tr>
<tr style="box-sizing: border-box;"><th style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">Jun 14</span></th><td style="border: 1px solid rgb(217, 217, 217); box-sizing: border-box; overflow: hidden; padding: 0.5rem; vertical-align: top;"><span style="font-size: x-small;">1.25%</span></td></tr>
</tbody></table>
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Whoa, that was a lot of blog space. If you want a descriptive version of what happened - here's an <a href="https://www.nytimes.com/interactive/2015/12/11/business/economy/fed-interest-rates-history.html?rref=collection%2Ftimestopic%2FVolcker%2C%20Paul%20A.&action=click&contentCollection=timestopics&region=stream&module=stream_unit&version=latest&contentPlacement=4&pgtype=collection"><span style="color: blue;">NY Times article</span></a>.</div>
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<b>So to summarize some of the events in the table, we have a few periods of interest. You have 1973 - 1979 where there were often times when real rates were either negative or close to being negative. Same can be said about 2004 - 2005 and then 2008 where real rates were negative at the end of the year. - 2016.</b></div>
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I believe monetary stimulus is much more effective (perhaps, <i>only</i> effective) when there is fiscal stimulus implemented in a concurrent fashion.</div>
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Here is a chart of long-term government spending.</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiqifPKQ9vmLdFjo8kL3JeroJQPVZstmdvsjDh8th5kjyb99GXG7-cxeE0WU_7oLvbNOQYp_CKN9FYtKF1ogHyUmMHglI8qpOMr1uNzXTSUXHwFeaZ-q3EEV52qQvlOqVtnu4-1/s1600/20171031+Fiscal+Stimulus+Timeline+US.JPG" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="490" data-original-width="579" height="540" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiqifPKQ9vmLdFjo8kL3JeroJQPVZstmdvsjDh8th5kjyb99GXG7-cxeE0WU_7oLvbNOQYp_CKN9FYtKF1ogHyUmMHglI8qpOMr1uNzXTSUXHwFeaZ-q3EEV52qQvlOqVtnu4-1/s640/20171031+Fiscal+Stimulus+Timeline+US.JPG" width="640" /></a></div>
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If you carefully look, I saw spikes in government spending relative to government receipts in 1975-1977, what looks to be around 1987, 1992, 2001, and then 2009. Therefore, I expect those times, if combined with low/negative rates to create a sizable amount of inflation.</div>
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The opposite trend could be said from the mid-1990's to 2000. I would expect low inflation during this period especially if real rates were positive.</div>
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Now tying it all together with the gold price. I have three screenshots. </div>
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<b>Rates: Nominal vs Real in different "regimes"</b></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjTM4NravTAePxi-E4iJVAs_X-Qtk1RAAEptDQb-vjrE0xPLGmbT471HqeMK9K6kxFVz9N-nvkXhMSKnQxKIv2i835aaVvFy_ByVDvrEw4ivcRPgz05GF3sRCVwngadMwfs9OBw/s1600/20171031+Real+Rates+vs+Nominal+Rates+Diff+Regimes.jpg" style="margin-left: 1em; margin-right: 1em; text-align: center;"><img border="0" data-original-height="1200" data-original-width="1600" height="480" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjTM4NravTAePxi-E4iJVAs_X-Qtk1RAAEptDQb-vjrE0xPLGmbT471HqeMK9K6kxFVz9N-nvkXhMSKnQxKIv2i835aaVvFy_ByVDvrEw4ivcRPgz05GF3sRCVwngadMwfs9OBw/s640/20171031+Real+Rates+vs+Nominal+Rates+Diff+Regimes.jpg" width="640" /></a></div>
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<b>Spot gold prices in corresponding "regimes"</b></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgZFXlj9VfThmTHHoHa33O68SLCRyIsawp0Ig5J1Apt9YfX6P4jiei8o7G2Iu9f47b2PdIwWrj2p-gaus28m5rnpeO1WmwRanFY2PopCnxGL8Vn7v6cBnl6Vo2r4tI1yLMpUsi8/s1600/20171031+Gold+Px+Diff+Regimes.jpg" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="779" data-original-width="1600" height="311" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgZFXlj9VfThmTHHoHa33O68SLCRyIsawp0Ig5J1Apt9YfX6P4jiei8o7G2Iu9f47b2PdIwWrj2p-gaus28m5rnpeO1WmwRanFY2PopCnxGL8Vn7v6cBnl6Vo2r4tI1yLMpUsi8/s640/20171031+Gold+Px+Diff+Regimes.jpg" width="640" /></a></div>
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My weekly data for gold doesn't go back that far - so <b>here is the chart for the first "regime (1975 to 1985) in <i>monthly</i> spot gold prices.</b><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj7xkuPyOW3YkXt8nhNzdmYJUkoR9SPlOHckkiO1DthJf27LxFekh6SQB8WupOwxYhsVZyPtTFZY_voUJ6TenWo28zOUuIDQsTtonxqEjsnOkTkgp9bOdAv4W8g4XD_ulNuJ5wk/s1600/20171031+1975+Monthly+Gold+Px+Regime.JPG" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="420" data-original-width="767" height="218" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj7xkuPyOW3YkXt8nhNzdmYJUkoR9SPlOHckkiO1DthJf27LxFekh6SQB8WupOwxYhsVZyPtTFZY_voUJ6TenWo28zOUuIDQsTtonxqEjsnOkTkgp9bOdAv4W8g4XD_ulNuJ5wk/s400/20171031+1975+Monthly+Gold+Px+Regime.JPG" width="400" /></a></div>
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<b>1975 - 1985</b></div>
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As you can see from the above: our data starts with gold falling close to ~50% (from 180 to below 100) from 1975 to late 1976 as real yields rose against steady nominals (a closing of the breakeven inflation). </div>
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Then, we experienced something extraordinarily scary - a rise in nominal yields with a falling real yield from 1978 to 1980. This development of inflation along with real yields actually trading lower led to an explosion in gold prices (trough to peak move of ~400% in one year) - proving that gold was indeed a good inflation hedge in this scenario. Finally, real yields marched higher along with nominals and gold went into a huge bear market.</div>
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<b>So yes, there can be a bond bear market (nominal rates rising) while there is a breakout in inflation - during which gold would be a great hedge. However, interestingly, even with low rates and inflation during the early and mid-1970's, gold actually fell ~50%. Remember, 1975 we had the increase in government spending as noted above. In addition, we had close to negative real rates.</b></div>
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<b>It seems that the direction of the real yield and the general direction of inflation actually caused gold prices to fall despite the absolute level of inflation was still high. </b></div>
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Bretton Woods and the oil shock were monumental events that contributed to all asset classes in this period. I'm not an expert on either of those subjects, so I will leave any potential contributions & impact of those events to this price action to you guys.</div>
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<b>1985 - 1996 </b></div>
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Moving on to the next time bucket. 1985-1996 saw a rally in gold from 1985 to 1988 coming out of the bear market. 1986 - 1987 saw a small pocket of breakeven inflation going higher, potentially triggering gold higher as well. </div>
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Interestingly as nominal rates continue to fall in the beginning of the 1990's - real rates roughly stay the same. <b>Gold did not trade closely with real rates in this scenario and instead tracked breakeven inflation as both kept getting squeezed lower.</b> </div>
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Lastly, you had meaningful moves in nominals and real yield first higher, then lower in 1994 to 1996. Gold ultimately did not care as it stayed tightly range bound.</div>
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<b>1996 - 2009</b></div>
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<i>A quick side note: of the 4 rates charts in the real vs nominal screenshot above, this regime's chart actually has the red line as the real yield and blue as the nominal - sorry for any confusion.</i></div>
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Continuing with the decrease in government spending and generally low inflation of the mid-1990's - gold continues to slide, goes nowhere.</div>
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Then, when we hit the 2000's, we started to see both nominals and real yield go lower. This move was roughly in tandem so I don't think breakevens were moving much. With a slight expansion of breakevens and inflation itself not really trading directionally despite lower rates and increased government spending, gold's reaction was to steadily build into a bull market.</div>
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In my opinion, this move in gold in the 2000's could be explained by persistently lower real yield. Inflation had risen slightly but it was nothing significant and definitely dwarfed by the move in gold.</div>
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Lastly, we have 2008 - 2009. Real yields spiked higher while inflation collapsed - gold subsequently sold off, tracking both inflation and real yields pretty well.</div>
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<b>2009 - Present</b></div>
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Post GFC, the most interesting period of time was late 2011 to 2013. Nominals started to bottom out while real yield continued to march lower. We began building higher lows in breakevens as inflation looked poised to go higher. </div>
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This actually proved to be the peak in gold. As real yields spiked higher in what was later deemed the taper tantrum with gold going into bear market ever since.</div>
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<b>Conclusion 2: After all that rambling, here's to summarize: I think gold is probably less of an inflation hedge than some might think. Although it does follow inflation to an extent - gold also seems to be very sensitive to real yield moves. If you believe real yields are set to rise along with inflation - then gold might not necessarily do very well - for example, 1981-1982, gold kind of topped out despite the fact that there was still pretty high inflation simply because real yields were rising.</b></div>
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<b>But then, you have scenarios such as the early/mid-2000's with low and steady inflation, with a consistently lower real yield, where we also witnessed the foundation of a huge gold bull market.</b></div>
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<b>And ultimately, there are scenarios of higher nominal yield and lower real yield - usually, they are ephemeral, lasting only a few months. However, we saw a meaningful one that lasted from 1978 to 1980. </b></div>
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<b>Keep in mind as with many things in the market, it seems that direction mattered more often than level. For example, when the widening of real and nominal rates in 1980 hit its zenith, gold was already peaking. </b></div>
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Other miscellaneous charts for your musings:</div>
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Here's FED and ECB assets vs spot gold price</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgA35g56SVSu_GPsolsv1f_GiA8cL9OevkiOggv8dx1lveTqSxLpIDhEBw2zmCjlOfOzb1_z01T1uEWSpDrqjLC2NwW-fkUfWSuzsVEPmjXnrau1bOiXz5CtsV5cvZgUxF_gDor/s1600/20171031+FED+%2526+ECB+Central+Bank+Balance+Sheets+vs+Gold.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="1200" data-original-width="1600" height="480" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgA35g56SVSu_GPsolsv1f_GiA8cL9OevkiOggv8dx1lveTqSxLpIDhEBw2zmCjlOfOzb1_z01T1uEWSpDrqjLC2NwW-fkUfWSuzsVEPmjXnrau1bOiXz5CtsV5cvZgUxF_gDor/s640/20171031+FED+%2526+ECB+Central+Bank+Balance+Sheets+vs+Gold.jpg" width="640" /></a></div>
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Here's gold vs the VIX</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgNBieLuakNTAKQc0GWXEfLchYjjBuLqQ2zGTXFTN_7UWvLx_xrCqGk-Kt7-5YHGAFbp8s5tp60YaPGguCL67s1c-jbHEn2BprwsyKyraTT5Ret3XmO-0VW6B1SH-gzcb_RX6yg/s1600/20171031+Gold+vs+VIX.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="1200" data-original-width="1600" height="480" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgNBieLuakNTAKQc0GWXEfLchYjjBuLqQ2zGTXFTN_7UWvLx_xrCqGk-Kt7-5YHGAFbp8s5tp60YaPGguCL67s1c-jbHEn2BprwsyKyraTT5Ret3XmO-0VW6B1SH-gzcb_RX6yg/s640/20171031+Gold+vs+VIX.jpg" width="640" /></a></div>
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I think our own Macro Man did a little bit of analysis on that one as well. I'm sure all the readers have seen that one, but in case you haven't, here it is - <a href="https://www.bloomberg.com/news/articles/2017-10-10/is-gold-really-a-good-hedge">linked here</a>.</div>
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And that's all I got this go-round, guys.</div>
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Hope everyone has a wonderful day and weekend. Stay warm out there!</div>
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Macro Clownhttp://www.blogger.com/profile/17196568155114537578noreply@blogger.com64tag:blogger.com,1999:blog-34323687.post-74512029655721974152017-11-06T17:30:00.000+00:002018-04-14T02:07:28.403+01:00Venezuela: A Bondholder Nightmare, A Market Failure. Where Was Macro?<div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<a href="https://www.caracaschronicles.com/2017/11/06/a-bondholder-nightmare/" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">This post</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> was written in collaboration with and cross-posted on </span><a href="https://macro-man.blogspot.com/2017/11/venezuela-bondholder-nightmare-market.html" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Caracas Chronicles</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">. Check them out! </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">“The time between the “outrageous” and “yeah, you didn’t know that?” can be incredibly short.”</span><br />
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">This tweet was about the Hollywood harassment scandal, but it applies to markets on a regular basis </span><span style="background-color: white; color: #222222; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">–</span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> and it certainly did in Venezuela last week. </span></div>
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<b id="docs-internal-guid-a7bb721a-12e0-5552-e071-4cabace2c597" style="font-weight: normal;"><br /></b></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Intrigue surrounded the amortization and maturity of two PDVSA bonds, which required roughly $2 billion for bondholders. Sanctions preventing US dollar transactions and new US dollar funding for the regime complicated the already difficult task of cobbling together payments with an absolutely broke government.</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">And yet... it paid.</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">PDVSA somehow bundled the October 28th amortization payment across the line, and promised, with some credibility, that the check would be in the mail for the maturity of the PDVSA bond of November 2nd.</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Then, one of the more surreal events in the history of sovereign defaults happened: after market hours on Thursday evening,</span><a href="https://www.wsj.com/articles/venezuelan-bond-prices-slide-as-nicolas-maduro-seeks-to-restructure-debt-1509722070" style="text-decoration: none;"><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> </span><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Maduro announced that the government will stop paying principal and interest on the current debt load</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">, the same day they pledged to pay back a bond at par. And what had been a tumultuous but profitable week for Venezuela bondholders, turned into a total nightmare.</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The 7% December 2018 bond saw its value cut in half from the high 60s Thursday afternoon, to the mid 30s on Friday, just above what many people use as assumption of what defaulted sovereign debt is worth in a restructuring.</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">With the wave of Maduro</span><span style="background-color: white; color: #222222; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">'</span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">s magic wand, “</span><a href="https://www.caracaschronicles.com/2017/11/02/debt-restructuring-thats-really-default-thats-really-giant-money-laundering-operation/" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Venezuelan default</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">” went from “outrageous” to “yeah, you didn</span><span style="background-color: white; color: #222222; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">'</span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">t know that?”</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Here</span><span style="background-color: white; color: #222222; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">'</span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">s where “macro” comes in. Those who’ve been following me for the last few months know that I have a healthy skepticism of macro trading strategies. There are traders out there who are constantly ahead of the curve, who see opportunities more quickly and accurately than the rest of the crowd, even in markets they don</span><span style="background-color: white; color: #222222; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">'</span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">t trade in every day. But for the vast majority of the universe, there has to be a definable edge when you are doing something the rest isn</span><span style="background-color: white; color: #222222; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">'</span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">t, whether it's a different type of analysis, or taking advantage of some market breakdown or regulatory change.</span></div>
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<b style="font-weight: normal;"><br /></b></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The different pools of capital in financial markets should produce enough diversity to keep markets “honest” in the same way Leo Messi keeps defenders “honest” because they have to protect against him charging to the goal or threading a brilliant pass to a teammate. You can’t “cheat” towards one or the other because you'll pay for it.</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">How did markets miss that Venezuela could default any day? Did they miss out on this chart, which shows nearly $4bn in payments going out the door in Q4 2017, for a country with stated foreign reserves of $10bn?</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="1" src="https://lh4.googleusercontent.com/wDRuvzREbWG_bYBhwl69ExeF-RUvvKGwSUhy_-cTPzYbfTO33846zZbCYCUtFviaAlRDYC97nHt4vnnG30j7_dHBvA0X-IbJVyB7k3CUmivSS5Lgz_90rcr063zC-NCp0F1siCvk" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="1" /></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">A few months ago, I talked to some EM managers on the subject. One sus</span><span style="background-color: white; color: #222222; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">pects that </span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">“</span><span style="background-color: white; color: #222222; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">(debt holders) are going to start bailing when it's too late, ourselves included. Anyone that has anything to do with an index gets burned by being underweight, so they inevitably come back. To step out of the position, you would have to compensate, and there isn't enough risk-adjusted yield to do so elsewhere.”</span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<b style="font-weight: normal;"><br /></b></div>
<div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">That's the “cheat”; for bondholders, Venny debt was a case study of game theory in Emerging Markets. </span><span style="background-color: white; color: #222222; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The market structure is set up in such a way that the biggest foreign investors were afraid to sell </span><span style="background-color: white; color: #222222; font-family: "arial"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">and afraid to buy.</span><span style="background-color: white; color: #222222; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> Macro investors should have stepped in and said “Look, the market thinks there is a better than 50% probability that 2018 maturity bonds will be paid at par next year. There's nearly $4bn in bond payments this year, another $10bn next year, versus $10bn in foreign reserves </span><span style="background-color: white; color: #222222; font-family: "arial"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">at best, </span><span style="background-color: white; color: #222222; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">for a country under sanctions that prevent access to new dollar funding.”</span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<b style="font-weight: normal;"><br /></b></div>
<div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: white; color: #222222; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Why didn’t they? There's a few reasons:</span></div>
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<b style="font-weight: normal;"><br /></b></div>
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<li dir="ltr" style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; list-style-type: disc; text-decoration: none; vertical-align: baseline;"><div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The capacity of repo markets to lend bonds has been greatly curtailed. After the post- Global Financial Crisis reforms, banks don't want the risk of lending bonds in a credit on the edge of default. This situation leads to a lot of difficulty in trying to establish a sizable short position in the bonds, and when you can, it can be prohibitively expensive; </span></div>
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<li dir="ltr" style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; list-style-type: disc; text-decoration: none; vertical-align: baseline;"><div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The size and risk appetite of global macro has been overwhelmed by the size of real money investors. The days of George Soros pushing around markets and central banks are over; enter the era of the multi-trillion-dollar passive asset managers such as Blackrock, Vanguard, Fidelity, etc.</span></div>
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<ul style="margin-bottom: 0pt; margin-top: 0pt;">
<li dir="ltr" style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; list-style-type: disc; text-decoration: none; vertical-align: baseline;"><div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The liquidity provided by Wall Street banks seized up further when the US imposed sanctions on USD transactions with the regime. A couple key players in the interdealer “wholesale” market stepped out after the August round of sanctions, worsening market liquidity and amplifying the wild swings Venny bonds are known for.</span></div>
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</ul>
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<span style="font-family: "arial";"><span style="font-size: 14.6667px; white-space: pre-wrap;"><br /></span></span></div>
<div>
<span style="background-color: white; color: #222222; font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">Call it what you will, self-preservation, or the</span><a href="https://www.caracaschronicles.com/2017/04/17/bachaquero-wall-street-makes-one-last-killing/" style="font-family: arial; font-size: 14.6667px; text-decoration-line: none;"><span style="background-color: white; color: #222222; font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;"> </span><span style="background-color: white; color: #1155cc; font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">Bachaquero on Wall Street</span></a><span style="background-color: white; color: black; font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;"> </span><span style="background-color: white; color: #222222; font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">trade, but guessing the date of the Venezuelan default has been a trader parlor game for over three years now </span><span style="color: black; font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">—</span><span style="background-color: white; color: #222222; font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;"> more than one hedge fund trader got carried out on the </span><span style="background-color: white; color: #222222; font-family: "arial"; font-size: 11pt; font-style: italic; vertical-align: baseline; white-space: pre-wrap;">short Venny</span><span style="background-color: white; color: #222222; font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;"> theme. Traders were lulled into complacency that Maduro would simply </span><span style="background-color: white; color: #222222; font-family: "arial"; font-size: 11pt; font-style: italic; vertical-align: baseline; white-space: pre-wrap;">find a way</span><span style="background-color: white; color: #222222; font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">. He didn’t.</span></div>
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<br /></div>
<div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt; text-align: justify;">
<span style="background-color: white; color: #222222; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">With macro traders sidelined and real money investors petrified, liquidity dried up and the market became hostage of local brokers and regime insiders, rather than economics and risk. A break that macro traders were unable to exploit… and Venezuelans couldn't prepare against. It is yet another testament to the power of market efficiency, and the consequences when it breaks down.</span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<br /></div>
<div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: white; color: #222222; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The losers in this game? Not the regime, the fixed income investors or even the hedge fund guys that shorted Venny too early: the real losers were the Venezuelans who died because there weren’t enough dollars to service the debt </span><span style="background-color: white; color: #222222; font-family: "arial"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">and</span><span style="background-color: white; color: #222222; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> import food and medicine.</span><br />
<span style="background-color: white; color: #222222; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span>
Shawn<br />
<a href="mailto:TeamMacroMan@gmail.com">TeamMacroMan2@gmail.com</a><br />
<a href="https://twitter.com/EMinflationista" target="_blank">@EMInflationista</a></div>
EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com26tag:blogger.com,1999:blog-34323687.post-50982366118746105762017-10-30T04:39:00.001+00:002018-04-14T02:07:05.855+01:00EMFX And USD, The World's Newest Petro Currency<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Well, even the St. Louis Fed </span><a href="https://twitter.com/stlouisfed/status/924303513303252993" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">has caught wind of this reversal in USD</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">: </span></div>
<b id="docs-internal-guid-8b96340d-6b8d-0f0f-9b08-57d872520567" style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="385" src="https://lh4.googleusercontent.com/iYwQ1tA0RSfXhkEuQdmDI6p6LulC_TO2vmnrlOlgMIZQrLgS3GhskY0NElvLpV-j4LFGFkVFWV7T94gf_MTOj3VwpkUXVldr-XXKynDTVY9SqUY3cRNSa-gwupo5lB4CC7V9AB9w" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="597" /></span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Indeed, it has been a nice run. Speaking of which, has anyone seen Abee? The guy splendidly calls the bottom in the USD trade and then does his best impression of J.D. Salinger. Come on man, take a victory lap...</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">What I find interesting about this move is not so much the fact USD has bounced back--as noted the long USD trade had a lot going for it, including way too sanguine Fed rate hike expectations relative to the state of the economy and underlying inflation drivers. More compelling is how during this reversal since the September FOMC meeting, high beta EMFX has gotten decimated. Take a look at the chart below, which is normalized spot currency performance vs. USD back to the end of June: </span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="497" src="https://lh4.googleusercontent.com/4qhjtVy7O_93GIuI0XZ-o1mR0wPNsa5GLriQuYwITgjwYXCE2Ga06ey2nCmXn9_fVEJe3DAUeaP02ulifCQ2EOZZO83EGcHCDv4LKU5BPT_utWE0u5YWKBqJN9Iwq4NinSPfJR0V" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="582" /></span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">At the top you have low beta names, those leveraged to China and the global growth cycle: KRW, INR and CNH. At the bottom you have three high-beta EM currencies: ARS, TRY and ZAR, all with their own political and/or economic problems and low real interest rates. </span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">What else do you notice about those bottom feeders? They’re all oil importers. Take a look at three more high beta EM currencies, but this time oil exporters: COP, RUB and BRL: </span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="532" src="https://lh6.googleusercontent.com/RY9iqpxJHMFjlj6UGVl6uZnZotf02V7EdrqXMkFKDIBn51whNBMnl1_x2HtkxND_H-2NPsi6Y_0UoWA-gy-6Own4C2xAZXbpk9VtA5RLPwFKZiUEyEYfkNVNED0LhUPUbpnhqnZy" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> </span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<br /></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">This basket has given back some gains, but are still skulking 1-2% from mid-Sept levels. Now let's dig out ye olde Brent chart...Another one that a peanut gallery regular (IPA, take a bow) nailed square in the chops a month or two ago: </span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="361" src="https://lh4.googleusercontent.com/d1GRwMzZyqBzj8nuRLwLv09zltm03c_HriQCgXb4L380vmftXRIEt8fkYq_PwCwDnfXUD2Z0453C4k-P5FaH5UanIhbkj82ur-owCGC1uuwLxuC-B1E-mFxBATvB3nFRtCwOFUSb" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">This leads me to a couple of conclusions for what is driving this move, and what may be next: </span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<ol style="margin-bottom: 0pt; margin-top: 0pt;">
<li dir="ltr" style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; list-style-type: decimal; text-decoration: none; vertical-align: baseline;"><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Don’t forget this chart: Demand has been the major driver of this move higher in crude. The supply side has been a snoozer. </span></div>
</li>
</ol>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="262" src="https://lh6.googleusercontent.com/gjyJgREjmI0ROMb25DW7rjTNQ6zFAL_y_0G93RwrFKmqXMNCNnm3TkdW2zKmz7Oe8Ce3f-9SnNIz82BBoKZ09fbv02nAB8ntKUuu-drLdNSd00AQW8c-B_EMYXYkcqUVY9Uwj91k" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="317" /></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> </span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-tab-span" style="white-space: pre;"> </span></span></div>
<ol start="2" style="margin-bottom: 0pt; margin-top: 0pt;">
<li dir="ltr" style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; list-style-type: decimal; text-decoration: none; vertical-align: baseline;"><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">As such, an economy that is growing aggregate demand, increasing interest rates, and exporting energy (if not crude, than the sum of coal, crude, LNG, and products) should do well, and so should its currency. Don’t discount the increasing correlation of USD to crude--a correlation I remember being close to -1 in the not so distant past. </span></div>
</li>
<li dir="ltr" style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; list-style-type: decimal; text-decoration: none; vertical-align: baseline;"><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Indeed, this is a relatively new phenomenon as US production has steadily increased. When I sat next to a nest of energy traders in the early part of this decade, they batted around the term “tight oil” a lot. I had to ask under my breath one day, “um, what is tight oil?” Shale. It means shale. Note the steady rise throughout this year.</span></div>
</li>
</ol>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="248" src="https://lh3.googleusercontent.com/Fm-MacRAurB-XuU4p3uxC3N2lPFtevFHXdi3G87r3wpqj318PQucDvnEe97P4H0NKA5s8MD2bGhaZczH2SHtNFjVqFATYajdeV5SaDXhkSqiPYv8_k8ZQjnii0SJTelS3kwt4o9L" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></div>
<ol start="4" style="margin-bottom: 0pt; margin-top: 0pt;">
<li dir="ltr" style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; list-style-type: decimal; text-decoration: none; vertical-align: baseline;"><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">So we have a situation where global growth is good ( +China), demand for consumer goods is strong ( +Asian exporters), which has led to higher commodity prices. Interest rates, if not quite buried in a the sandpit of a couple of months or a year ago, are still not getting out of hand. In sum, that's a pretty attractive scenario for EMFX. Where does that leave the high beta energy importers? </span></div>
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<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Well, I think in pretty good shape, because of that last chart. Oil prices are still well off their highs and new tight oil production is the marginal barrel in the energy market. For the carry-trade energy importers, terms of trade haven’t taken that bad of a hit, especially when offset against gains in other commodities (copper, etc.) or export demand at large. </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The total whitewash in some of these currencies looks more like positioning getting too heavy in carry trades during the 2017 weak USD trend. I think that is a bit overdone here- a view I have some confidence in for a couple of reasons: </span></div>
<ol style="margin-bottom: 0pt; margin-top: 0pt;">
<li dir="ltr" style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; list-style-type: decimal; text-decoration: none; vertical-align: baseline;"><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Risk markets elsewhere are taking out new highs</span></div>
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<li dir="ltr" style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; list-style-type: decimal; text-decoration: none; vertical-align: baseline;"><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">No material change in interest rates (yet) that would change the economics of carry trades</span></div>
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<li dir="ltr" style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; list-style-type: decimal; text-decoration: none; vertical-align: baseline;"><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">BTD mentality doesn’t stop at FANG stocks…</span></div>
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<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">ZAR certainly is a strange animal and has been hammered for reasons well beyond terms of trade. But the combination of political noise and higher oil prices has supercharged this move--not unlike what we have seen in MXN over the past few weeks as the NAFTA spitting contest heated up. </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Where will politics take these currencies? Plenty of opinions out there on that--I have my views which are beyond the scope here; the point is USD is more highly correlated to global growth than any time in the past, and “risk-on” currencies are poised for a come back if the underlying dynamics remain intact.</span><br />
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span>
Shawn<br />
<a href="mailto:TeamMacroMan@gmail.com">TeamMacroMan2@gmail.com</a><br />
<a href="https://twitter.com/EMinflationista" target="_blank">@EMInflationista</a></div>
EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com61tag:blogger.com,1999:blog-34323687.post-7877261821957616342017-10-24T15:27:00.000+01:002018-04-14T02:06:44.612+01:00European Inflation Breakevens Show...US Tax Reform Not Priced In?<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">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. </span></div>
<b id="docs-internal-guid-0f5646f0-4ec6-c5ed-d92e-688f26e5911a" style="font-weight: normal;"><br /></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">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? </span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="438" src="https://lh3.googleusercontent.com/qa8AbSDlGZBWCPxXmspi9JLMDRsxwhN0lm6Z0nb1l831OSKgKpm5Y13Qzmsf1rW5lWDzFWI483XnMxQxxdozIT6dz8D12DEtkNhgPshJZr3WggzAVm9i0mSofXVNKcU306oV80Ui" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="571" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">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. </span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="299" src="https://lh5.googleusercontent.com/4e750RGdztHeYrJEZDSNNzl2U1WiFOdp6RTVoHdGXAR1dzkAix72be3hyA77MkoKx9RQSuH3iISNYlX5KrvnWuNfMzx9rsznk8OQDLsVEBEegFnDEjBhtUf2jp-Mhlexxf-VsRgQ" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">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. </span></div>
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<li dir="ltr" style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; list-style-type: decimal; text-decoration: none; vertical-align: baseline;"><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Nov 11, European Debt Crisis</span></div>
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<li dir="ltr" style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; list-style-type: decimal; text-decoration: none; vertical-align: baseline;"><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Mid-2012, Taper tantrum</span></div>
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<li dir="ltr" style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; list-style-type: decimal; text-decoration: none; vertical-align: baseline;"><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">2015, Falling oil prices/EM stress/EU deflation fear</span></div>
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<li dir="ltr" style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; list-style-type: decimal; text-decoration: none; vertical-align: baseline;"><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Nov 2016: Trump/April 2017: Fed Hiking/ECB sitting on hands </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Today? The residual is zero, and has been stuck in a roughly 5bps range since May. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="288" src="https://lh4.googleusercontent.com/030O4H3BpfAAzoVXb-2WEtwMEdRzAxxgYzRgCFepY4898h-HFSwoMeLhJSwaQQTEkqs0dYP2bmhWQ8oWRtTbvK4NsF0pJa-uzYaBQmP7vfWON4eGyLmEvZFaDJVu-KvMT826sODp" style="border: none; transform: rotate(0rad);" width="624" /></span></div>
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<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">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. </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">And quickly on another of my favorite subjects: if you read one piece about foreign exchange this week, make it </span><a href="https://www.cfr.org/blog/make-foreign-exchange-report-great-again" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Brad Sester’s most recent post on “Follow the Money”</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">. 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 </span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">not</span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> work because the BoK was on the bid). </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">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.</span></div>
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Shawn<br />
<a href="mailto:TeamMacroMan@gmail.com">TeamMacroMan2@gmail.com</a><br />
<a href="https://twitter.com/EMinflationista" target="_blank">@EMInflationista</a></div>
EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com52tag:blogger.com,1999:blog-34323687.post-22835709975639986232017-10-23T06:27:00.003+01:002018-04-14T02:06:26.543+01:00Czech and Hungary Monetary Policy--Distant Cousins? <div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">In one of last week’s post, I made <a href="http://macro-man.blogspot.com/2017/10/the-macro-renaissance-or-dollar-is-dead.html" target="_blank">some off-handed remarks</a> about what makes a good macro trade, or in that case, what doesn't. Yes, you need a big picture view. You need complacency, stupidity, regulatory dislocation, misaligned incentives, or some combination, to generate the market mis-pricing necessary to score big when there is a catalyst to set the tinder ablaze. </span></div>
<b id="docs-internal-guid-d7cccc66-47aa-c849-1cdb-096293a03e61" style="font-weight: normal;"><br /></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Reading the newspaper over the weekend, I got thinking about the Czech Republic after the anti-establishment ANO party won big, putting their pseudo-Perot type figure Andrej Babis in line to be the next prime minister. </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">I thought the big story would be the large share of the vote won by anti-establishment candidates in this election and last week’s election in Austria. If you look at the type of candidates that are winning elections in Central Europe, it is consistent with </span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 700; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">the global trend towards liquidating the establishment, </span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">more so than necessarily far-left or far-right movements. Look at recent history: the United States, France, South Korea (sort of, by South Korean standards anyway), and Czech Republic have elected decidedly anti-establishment figures, while non-traditional and/or radical parties or candidates have done well in the UK, the Netherlands (Wilders and the Greens still gained seats at the expense of the establishment, even if not as many as predicted), Czech (again) and Germany. </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Indeed this is the story of 2017, and will continue to be later this year and into 2018 when we will get potentially market moving elections in Mexico, Brazil, and Italy--with an election in Hungary already in the bag for their nationalist prime minister, Viktor Orban--who arguably kicked off this trend in EMEA back in 2010.</span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Yet after kicking the tires on Czech assets over the weekend, there doesn’t seem to be much stress about politics. The far bigger story this year has been </span><a href="http://www.cityam.com/262518/czech-koruna-jumps-after-central-bank-unpegs-currency-euro" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">the decision by the CNB to float the koruna, allowing it to appreciate versus the euro</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">. And as so often happens, the really juicy macro trade may be a layer beyond the current potential for policy tightening in the Czech Republic.</span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">First, getting an award like this is always a little awkward. It is like winning coach of the year in the SEC West. Sure, great job...but come on...look at the neighborhood. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="268" src="https://lh4.googleusercontent.com/RmZ4fUgNtJ1zonwBAUojnSDXUyxB9rKahTbfvNeRSgBC7YHNO9pJE7vppwl7lY9zy6iAg9SVDpWwh5CzYMWaHuXzd9kyLtfu9rJrrwaij5UDcXvgloowMu_PejoTcHvjDJbaFqI6" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="481" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Yet the CNB is a strong, highly credible organization. Their chief economist hit the tape with </span><a href="https://www.cnb.cz/en/public/media_service/interviews/media_2017/cl_17_171018_holub_bloomberg.html" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">this hatchet job on the rates market late last week</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">: </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="312" src="https://lh5.googleusercontent.com/fWGkTZVabwwds0nTWvC8zYdo-gZsCmOAkSmkFNSqMSvszNWLqTaPDCKnK7EfMzL25tR1fUl3o_qutWNl6Hro6n364HulVrvpo4WwK6qpOm__UekKxIUfaa9EMB-SC9dUZU4Pm8Vy" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="493" /></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Doesn’t get much more explicit than that. </span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;"><b><u><i>Listen to the game masters. </i></u></b></span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">This type of verbal intervention, or forward guidance if you prefer, has pressed rates and CZK higher. </span><span style="font-family: "arial"; font-size: 11pt; white-space: pre-wrap;">If rate hikes are coming, is there still more upside in CZK? The currency has continued to well over the last couple of months...note the break higher from high levels </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="217" src="https://lh3.googleusercontent.com/HgsnR7SqAEQ4GMKluiiDqviVQDhW8Fdd1So8J9EmlhJRBJZ0QjEv88hYYxd5y2o9Qmo1SLsli4x2pEx81JaiiGUGJ9rpDXXwbhUPPSADj8_dizKXSFccqmPFTCkqKQ2rGlAU2Qmj" style="border: none; transform: rotate(0rad);" width="400" /></span></div>
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<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">And interestingly, duration has gotten pummeled. A big element here is that foreign investors piled into the country recently, and now are getting barbequed by rate hike expectations. CZK REER has only broken away from its CE peers since the break higher in rates over the past couple of months. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="233" src="https://lh6.googleusercontent.com/Z5MMpsFa2Z9069yfncc66Zp8WZDtto4cqHS3CyQJnjgUWzl3GMLG_VC_llblX9YUFnvwnVRa--qMnYrdT0y6SzO4P3D7Khsjk9QaEK6ELhXAvn5pliLNedgzX1HjckWmV5-aL0nP" style="border: none; transform: rotate(0rad);" width="400" /></span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Yet the move in the currency is totally uninteresting when compared to the Teutonic juggernaut to the west: </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="233" src="https://lh3.googleusercontent.com/Uaqz3gw6K4_WP3BIykjsvaWUaa0gqRav0AuV6Osopq8LrD2pOjdkW6Il2dslhFWIGwYCUr8iNkquA5ftvpf68rIkVspUh-Q4Zw_C7dCYUBmQszBkMguQwsDXSL66LII7Wr9LPz8P" style="border: none; transform: rotate(0rad);" width="400" /></span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">That leads me to believe that unless there is some weird softness in the inflation data, the CNB will have to deliver on the rate hikes priced into the curve, which should continue to support CZK over the next few months. </span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Perhaps lost in the din is why CNB is tightening policy in the first place. Inflation!! I found it Margaret! But what is the first thing you notice in this chart? </span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 700; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Hungary and Czech HICP have been pinned to each other for most of the past four years. </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="233" src="https://lh5.googleusercontent.com/wuPBS8qIVaJdP88D8L3a8UdBbwh1EnOxDiRwihuDOOUYXAO-My6VwBh5WtSAcPjKCw67uaSZKKD87ppa--N6MXzGEzyTbv8RbgiV2Jt97H_sL-Ujh7Rch0KtITPdaFync30-PvkL" style="border: none; transform: rotate(0rad);" width="400" /></span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">So we might expect the HNB to be following a similar course to the CNB? No, quite the opposite. </span></div>
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<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">I have to admit, this is one of my favorite charts of the year. The 2y rates crossed only days before the CNB allowed the CZK to float and </span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 700; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">the two trends barely took a breath, despite inflation following in lockstep! </span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> I’ll have to go a few more rounds in the EMEA ring to build out this idea, but that inflation chart and the cross in 2y HUF and CZK rates is what a breakdown in central bank credibility looks like. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="179" src="https://lh5.googleusercontent.com/FpCpJ5XSIw4Vyt-hO2q81Gogx-x4RiwdaX0y_1RYOPvQxad16ny5FDyw2KAc8D0YX-KjDVj3hLogbS74lKa3tse642MA6YBsh6Noq8DtcAwrnMlAqhVP5ItYYCl70zMgpr6y4ya9" style="border: none; transform: rotate(0rad);" width="400" /></span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">We have some dry tinder here: </span></div>
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<ul>
<li>higher inflation, </li>
<li>a very tight labor market, </li>
<li>a government that has to borrow tons of money every year to finance itself, and </li>
<li>inflows from the EU</li>
</ul>
<span style="font-family: "arial" , "helvetica" , sans-serif;">Will that cause inflation expectations get out of hand in Hungary, leading to a panic among the notable number of foreign investors, and force the HNB to tighten policy, despite a questionable record of independence and a parliamentary election coming next year? </span><br />
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="background-color: transparent; color: black; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">For now I think the answer is still “no”, the prior REER charts don’t illustrate a big dislocation in competitiveness, and the chart below argues the currency side might be more of a “single” than a homer. But rates...yes….carry/risk vs. reward ratio could be </span><span style="background-color: transparent; color: black; font-style: italic; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">very</span><span style="background-color: transparent; color: black; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> appealing. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="264" src="https://lh4.googleusercontent.com/LstJtv-NwbAjn6mLTnjCfPZOukeeGd5cyvvK87IxgFjtqo0wz2-xWqGQAsgtnVPFEyDZ96NZVyZAZDJfo6UBRyZjQAQiPKbSRnVYfWccoMuRYiUNKTeRQiZJcCb_D6-EdoTRlQsU" style="border: none; transform: rotate(0rad);" width="400" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Rates in Hungary </span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">should </span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">be higher. But nobody makes money on should. Will it actually happen? Place your bets, folks. Macro at its finest. </span><br />
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span>
Shawn<br />
<a href="mailto:TeamMacroMan@gmail.com">TeamMacroMan2@gmail.com</a><br />
<a href="https://twitter.com/EMinflationista" target="_blank">@EMInflationista</a></div>
EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com19tag:blogger.com,1999:blog-34323687.post-15288705528201401322017-10-20T16:53:00.003+01:002018-04-14T02:06:11.773+01:00Friday Roundup: CNY Internationaliztion (not), Another FOMC One-Off Excuse, and Oil Demand<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Today is the morning prices had to find me...from my wi-fi resistant hovel in the rural midwest I hear the </span><a href="https://www.bloomberg.com/news/articles/2017-10-19/asia-stocks-to-end-the-week-lower-kiwi-holds-loss-markets-wrap" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">treasury curve is bear steepening</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">...can it be?!? The rhetoric behind the Senate bill looks like “we can all have a unicorn” type stuff...tax cuts for all!! I’d hazard a guess that nobody has made a buck this year going long on Trump’s ability to execute--so I’m still skeptical. </span></div>
<b id="docs-internal-guid-5dc3dbfb-3a79-adee-9066-afab397ef9f9" style="font-weight: normal;"><br /></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Notable moves in Canada as well...driven in part by lousy data but also moves by the </span><a href="http://business.financialpost.com/real-estate/mortgages/canadas-banking-watchdog-sets-new-rules-for-mortgage-lending" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">local regulator to tighten mortgage standard</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">s. This gets back to an issue about</span><a href="http://macro-man.blogspot.com/2017/06/canada-house-prices-cad-rates-and-boc.html" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;"> local versus national housing price increases</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> I addressed over the summer--stay tuned for an update next week. </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">And a little housekeeping here-- I couldn’t post this chart in the comment section of the previous post, but I thought it was worth highlighting. </span><a href="https://www.economist.com/news/finance-and-economics/21730200-and-forthcoming-communist-party-congress-unlikely-kick-start-it" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">CNY is 2% of international payments</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">, and (arguably) falling. Beijing and the PBoC are dragging their feet on the internationalization of the currency--they simply don’t want it...yet. They prefer (capital) control and stability. While there have been some signs that Chinese local debt will gain greater acceptance in real money circles or (gasp) EM local market indices, we’re not there yet either. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="351" src="https://lh6.googleusercontent.com/QGuw-WGXhHse_zXZ-iGuaGvMHYnKoFlWHZdwJT-z9GDjItvGUz3zkwx5isfA2MHfqp8LoD1AZvH_FTN4Ruzmo8vtWeHHCRRSSNW89flk8o15G9MSX1ng3sHPtlkOY49HhBOgxZda" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="341" /></span></div>
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<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">I’d like to quickly circle back to “Fed speak”, which will become more important as we finally get a answer from Trump on the next chair of the FOMC, and more data over the next couple of weeks. </span><a href="http://www.frbsf.org/our-district/press/presidents-speeches/williams-speeches/2017/october/interest-rates-and-the-new-normal/" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">In a speech in early October</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">, San Francisco Fed chief John Williams gave another hypothesis on the “one-offs” that might be sandbagging inflation: </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">“</span><span style="background-color: white; color: #333333; font-family: "arial"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">An even bigger contribution to low inflation has been coming from the healthcare sector. Mandated cuts to Medicare payment growth, which also tend to be incorporated into payments for nongovernment health services, have kept inflation in overall health-care services unusually low for several years. These legislated changes have been a key factor holding inflation below the Fed’s 2 percent target, despite a strengthening economy.”</span></div>
<b style="font-weight: normal;"><br /></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: white; color: #333333; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">He reiterated this stance in a breezy </span><a href="https://www.nytimes.com/2017/10/17/us/politics/federal-reserve-strong-economy.html" style="text-decoration: none;"><span style="background-color: white; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Q&A with the New York Times </span></a><span style="background-color: white; color: #333333; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">earlier this week. Does Williams’ health care hypothesis have any more efficacy than Yellen’s targeting of telecom prices? Let’s look at the numbers.</span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: white; color: #333333; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Indeed, Medical care CPI has cratered and currently stands below core CPI for the first time since </span><a href="https://www.youtube.com/watch?v=Qkuu0Lwb5EM" style="text-decoration: none;"><span style="background-color: white; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">“Who Let the Dogs Out” </span></a><span style="background-color: white; color: #333333; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">topped the charts. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="318" src="https://lh5.googleusercontent.com/t3aO6jHf1kOWf_r61OLTgvFA4hhl0QZVns22jJCcGr3wcWdwP0XQB3pksphLl5S9TJMI9tePzYLXbNE_lKdwfizUUVB_vgR1v2CvCIaZ5BZ8W4xGVI9fB1l28aWsK8dWSfKaxYBr" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="541" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">But there’s a strong correlation there--the NY Times article implies medical care CPI is unrelated to headline--but this chart would argue otherwise. The contribution of medical care CPI is at the lows--but off of very high levels that single handedly drove core CPI above the 2% threshold around the beginning of the hiking cycle. Now that has normalized. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="364" src="https://lh5.googleusercontent.com/4QTmrPo5faPUj4CySVs7sSvQTFAfh2Nma4IvTbB4-YfgSc_pH5plbGCxkdJcwrI5DYoDX9L7GgjlMT5nFVwr6T9maXjnFvH5vOM-NSJj2FlWdfw-BOLrkqaFBk9Tfz599zawumJq" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="334" src="https://lh3.googleusercontent.com/-m_CxdRHehPZtgAji4qb1jAReKafD6tUUQUH30CVH-DlZJafP7QV6OunDdzTcRwKxPGRZoJhuP94sr8IaSC7jMceh4qfZtgWgook57f75ZdS-qOzNAk1BMq-5enMvkz8O-6yvys8" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="566" /></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">While I would agree with Williams this is a bit of an outlier, it is also one that is highly correlated with underlying CPI trends. Skilled labor is a significant portion of medical expenses and thus will increase somewhat in line with nominal GDP. Look for a mean reversion bounce back here which will drag core CPI higher, but not enough to really be a game changer for monetary policy. But thanks Dr. Williams...keep those theories coming!!</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Lastly I quickly want to touch on oil prices. WTI is still top of the range, and while Brent (below) has finally broken the 56 level, it simply refuses to take a run at 60. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Supply has been a two way street here, with continuing OPEC chatter, issues in Iraq, and continued free flowing wells in the US. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">I have inside source on the supply demand picture in the oil industry. </span><a href="https://www.newyorkfed.org/research/policy/oil_price_dynamics_report.html" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Ok, it’s the New York Fed. </span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Check out how demand has been growing as a contributor to the oil price since the recent lows in early July: </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="296" src="https://lh4.googleusercontent.com/OMgeCRd104YJ1eIkGXBOQ0dtsocAdZIx-lqMCGsCz7xpUPXouF5P7FgUrDEvYETAu9b2xnsUf0PfgCU2PCzMflNNrKQd_znUygMTUv3U_qFxWr5aLsDEYLtg5NFpM3bGqpKLCakz" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="373" /></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Demand isn’t dead!! Keep a close eye on tightening supplies because any OPEC resolution or supply disruptions could have a much bigger beta on oil prices than they have in the past, especially with US production much closer to full capacity than it was a year ago. </span></div>
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Shawn<br />
<a href="mailto:TeamMacroMan@gmail.com">TeamMacroMan2@gmail.com</a><br />
<a href="https://twitter.com/EMinflationista" target="_blank">@EMInflationista</a></div>
EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com19tag:blogger.com,1999:blog-34323687.post-72562302232612153812017-10-19T07:23:00.000+01:002018-04-14T02:05:45.145+01:00"The Macro Renaissance" or "The Dollar is Dead, Long Live Macro"<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: inherit; font-size: large; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Think about history’s great entrepreneurs: the people that set out to change the world, and did just that. Today’s best example is Elon Musk. Take a couple minutes out of your busy day and watch a bit of his presentation of the Tesla Powerwall. </span></div>
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<span style="font-family: inherit; font-size: large;"><span style="background-color: transparent; color: black; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">What do you notice first, other than entry music fit for the reigning WWE Intercontinental Champion? Elon has a great hook. </span><span style="background-color: transparent; color: black; font-style: italic; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Fossil fuels are going to destroy humanity. </span><span style="background-color: transparent; color: black; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Now think about your last powerpoint presentation to an investor, client, or boss. Yeah, you used some generic corporate-approved background theme and loaded it down with bullet points and charts. Me? “Guilty.” Good grief, the evidence is probably out there on the interwebs somewhere. </span></span></div>
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<span style="font-family: inherit; font-size: large;"><span style="background-color: transparent; color: black; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">I bring this up after reading an article in last weekend’s edition of Barron’s, </span><a href="http://www.barrons.com/articles/the-coming-renaissance-of-macro-investing-1507957012" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-style: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">“The Coming Renaissance of Macro Investing”</span></a><span style="background-color: transparent; color: black; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> by macro superstar John Curran. He opens with a story about Nixon’s Treasury Secretary William Simon cutting a deal with the Saudis in mid-1974 to buy their oil in exchange for recycling those dollars into US treasuries. Curran claims this set the stage for two generations of US opulence because USD “demand” from petrodollar states underpinned the strength of the dollar as a reserve currency and allowed the US economy to grow amidst low and relatively stable interest rates. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: inherit; font-size: large; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">That's a good hook--not quite Musk’s threat to global humanity, but one that appears to show a courageous Treasury secretary that stepped into the crucible and saved America from inflationary doom. </span></div>
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<span style="background-color: transparent; color: black; font-family: inherit; font-size: large; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">We could sit here all day and argue about the economic history of the United States and the role of the dollar’s reserve currency status in the development and maintenance of a global hegemon. Let’s look at the facts. </span></div>
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<span style="background-color: transparent; color: black; font-family: inherit; font-size: large; font-style: italic; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Source: St. Louis Federal Reserve and Energy Institute of America</span></div>
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<span style="background-color: transparent; color: black; font-family: inherit; font-size: large; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">This chart shows the gap between the current account deficit and net oil imports as a percentage of GDP. In the early 70s, this was a significant issue. America had a strong manufacturing and export base, so when the Arab oil embargo put those imported barrels at risk, and the price of oil skyrocketed, exports suffered, and US consumers were squeezed. </span></div>
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<span style="background-color: transparent; color: black; font-family: inherit; font-size: large; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Curran correctly notes that the deal between the US and the Saudis was about neutralizing oil as an economic weapon. But it was far more about national security and guaranteeing energy supplies than it was about recycling petrodollars and establishing the USD as a reserve currency in a post-Bretton Woods world. </span></div>
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<span style="background-color: transparent; color: black; font-family: inherit; font-size: large; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">That didn’t come until several years later, when President Reagan declared “morning in America”. By the 1980s, Europe was still a fractured, socialistic mess, while relative prosperity in the United States, unsurpassed financial markets, the Cold War and strong property rights conspired to give Reagan the ammunition he needed to up the ante on the Soviets: bonds. </span></div>
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<span style="background-color: transparent; color: black; font-family: inherit; font-size: large; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The key ingredient: Foreigners wanted US assets. They bought treasury bonds. They bought Michael Milken’s junk bonds. They bought Louie Raneri's mortgage-backed securities. They bought corporations. They bought golf courses. They bought movie studios. Anyone remember the press squealing about the Japanese buying up the entire United States? </span></div>
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<span style="background-color: transparent; color: black; font-family: inherit; font-size: large; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Help me out here...is Japan a big oil exporter? No. The world wanted our assets because we were buying their oil AND their stuff--and we had the best assets and rule of law on offer. </span></div>
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<span style="background-color: transparent; color: black; font-family: inherit; font-size: large; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The demand for US assets to finance the current account deficit was MUCH bigger and deeper than Curran claims. That’s important because he uses the petrodollar argument as the foundation for his claim that the Chinese are due to seize the dollar’s global reserve status.</span></div>
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<span style="font-family: inherit; font-size: large;"><span style="background-color: transparent; color: black; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">There is certainly some appeal to his argument: he details the ways in which the Chinese are seeking to rotate away from the dollar as a medium of exchange in oil markets. To understand that to be a threat to the dollar’s status as a reserve currency ignores the last points in the above chart: </span><span style="background-color: transparent; color: black; font-style: normal; font-weight: 700; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">net oil imports as a percentage of GDP are approaching zero...and adding in the trade surplus in petroleum products leaves energy as a positive or immaterial force in US financial flows.</span></span></div>
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<span style="font-family: inherit; font-size: large;"><span style="background-color: transparent; color: black; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Curran notes that the increase in domestic production has led to lower oil prices and lower revenues for Gulf states--but he pushes that argument too far when he says that leads to lower demand for Treasuries and dollars. If we are </span><span style="background-color: transparent; color: black; font-style: italic; font-weight: 700; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">exporting </span><span style="background-color: transparent; color: black; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">oil, won’t we receive dollars in return? Won’t US exporters than invest that money either in expanding domestic production….or in US treasuries, corporates, or equities? </span></span></div>
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<span style="font-family: inherit; font-size: large;"><span style="background-color: transparent; color: black; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The last plank in this piece circles back to macro at large, which can be summarized as </span><span style="background-color: transparent; color: black; font-style: normal; font-weight: 700; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">MACRO IS DEAD. LONG LIVE MACRO. </span><span style="background-color: transparent; color: black; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Everyone says macro is dead. Must be a contrary indicator. What’s the evidence here? </span></span></div>
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<span style="background-color: transparent; color: black; font-family: inherit; font-size: large; font-style: italic; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The Fed “normalization” will lead to diminished support for the US Treasury market. ...The US will need to finance enormous and growing entitlement programs, and our historical international sources will no longer support us.</span></div>
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<span style="background-color: transparent; color: black; font-family: inherit; font-size: large; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The key here is central bank credibility. Say what you want about the Fed, the flat curve and (relatively) resilient USD is telling you the market believes they will strangle inflation behind the metaphorical dive bar of global financial markets. That’s another plank in the arsenal of a global reserve currency and one that isn’t going away soon. </span></div>
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<span style="background-color: transparent; color: black; font-family: inherit; font-size: large; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">There is little evidence that global investors are on the verge of abandoning their faith in the US in favor of China. China exports goods (their trade surplus) which leaves them a BUYER of foreign assets. What are they going to buy? Russian corruption? Until the Chinese consumer becomes even close to the rabid, voracious, insatiable animal known as the American consumer, this trend isn’t changing. </span></div>
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<span style="background-color: transparent; color: black; font-family: inherit; font-size: large; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">And lastly, despite our president’s best efforts, the US is still a destination for capital the world over when people want to put their money in a safer place. That’s not about to change either--not for people in Latin America, the Gulf States, Africa or even China. </span></div>
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<span style="background-color: transparent; color: black; font-family: inherit; font-size: large; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">We all like to think of ourselves as contrarian investors, or smarter than the average bear. But this one just doesn’t hold water to be the “paradigm shift” that blows us out of the current malaise of low volatility and rings in a new era of macro investing. </span><br />
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<span style="font-size: large;">Shawn</span><br />
<a href="mailto:TeamMacroMan@gmail.com"><span style="font-size: large;">TeamMacroMan2@gmail.com</span></a><br />
<span style="font-family: inherit; font-size: large;"></span><br />
<a href="https://twitter.com/EMinflationista" target="_blank"><span style="font-size: large;">@EMInflationista</span></a></div>
EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com26tag:blogger.com,1999:blog-34323687.post-63343785758633338322017-10-16T17:16:00.001+01:002018-04-14T02:05:15.900+01:00The FOMC and "Surprising" Low Inflation: Careful Analysis or Willful Ignorance?<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: blue; font-family: "arial"; font-size: 11pt; font-style: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;"><a href="https://www.federalreserve.gov/newsevents/speech/yellen20171015a.htm" style="text-decoration: none;">On Sunday, in a speech to the IIF, Janet Yellen again expressed her “surprise” at low inflation figures</a>:</span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> </span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">“</span><span style="background-color: white; color: black; font-family: "arial"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Inflation readings over the past several months have been surprisingly soft….”</span></div>
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<span style="background-color: white; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Our friend Polemic </span><a href="https://twitter.com/PolemicTMM" style="text-decoration: none;"><span style="background-color: white; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">nailed it on Twitter:</span></a><span style="background-color: white; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> </span></div>
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<span style="background-color: white; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="210" src="https://lh6.googleusercontent.com/ELqGJ7owTdLSWmuhuQcMBreTPQeues14Po8KHCrIh9E0txYsaQZj8po2sDYfkTfj-AE7-PrGnjlnv_bm5GpMP35zYa4DoDdtfwbW-pHamDoNu9cvOFBlH5smtkaBrHN2IPDlMdzm" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="583" /></span></div>
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<span style="background-color: white; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Indeed...the Chairwoman goes on to detail just what was so surprising: </span></div>
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<span style="background-color: white; color: black; font-family: "arial"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">“...The recent softness seems to have been exaggerated by what look like one-off reductions in some categories of prices, especially a large decline in quality-adjusted prices for wireless telephone services.” </span></div>
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<a href="https://www.federalreserve.gov/newsevents/pressreleases/monetary20171011a.htm" style="text-decoration: none;"><span style="background-color: white; color: blue; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">And the September minutes</span></a><span style="background-color: white; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> didn’t mention wireless prices by name, but it is tough to believe that wasn’t under the hood here: “In addition, many judged that at least part of the softening in inflation this year was the result of idiosyncratic or one-time factors, and, thus, their effects were likely to fade over time.”</span></div>
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<a href="https://www.cnbc.com/2017/07/05/fed-minutes-inflation-to-rise-loose-policy-posing-risks.html" style="text-decoration: none;"><span style="background-color: white; color: #4a86e8; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Same script back in July</span></a><span style="background-color: white; color: #4a86e8; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">:</span><span style="background-color: white; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> "idiosyncratic factors, including sharp declines in prices of wireless telephone services and prescription drugs, and expected these developments to have little bearing on inflation over the medium run."</span></div>
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<span style="background-color: white; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">As most of you know I am outside the orbit of most sell side research. I find US economic research particularly vexing. Have you read any economists take apart these talking points and evaluate if their veracity? </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">This is a chart of the </span><a href="https://www.newyorkfed.org/research/policy/underlying-inflation-gauge" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">NY Fed’s underlying inflation gauge “prices-only” index</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">, which I dug into a while back </span><a href="http://macro-man.blogspot.com/2017/09/new-underlying-inflation-gauge-from-ny.html" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">in this post</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">. It doesn’t take into account financial conditions and other non-price measures. It continues to rise, despite the fall in core CPI, Core PCE (through August) </span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br class="kix-line-break" /></span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="308" src="https://lh3.googleusercontent.com/Xq7DpJUnwY9umk_XEDWkNgEYQPUHM662kK7AMjFoMdlZJmMKRht5-JzUeMl3U8_FovwYFrC-_UceoQmMmwjbUARfcJYyYWs5oSVj9GkVAAOHsNSPBk3nTN3-LpQHUlRNJNJIWCLh" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="526" /></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Adding in financial conditions, the UIG index is getting into some frothy territory similar to what the US experienced in the late 90s and mid 00s. The break with PCE measures is stunning.</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="308" src="https://lh3.googleusercontent.com/co8fmlevZJ5FfCa_wsb2laeAKjc4yjuyQjYIo_VsnTNRx8GoRiWVWHwGKj4CZWakoC1q8JXMIoA7vXzHPFQbojARegFw2laKRwl2wIRCxOyoZUonxRITFsooivPB1Yub55QRANHL" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="526" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">So yes, perhaps some one-off idiosyncratic factors at work in the low headline readings. If you look at the Fed speak, Yellen isn’t the only one that has cited wireless prices….The FOMC leadership clearly has established this as their explanatory variable workhorse. And indeed, prices gapped lower earlier this year: </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="292" src="https://lh4.googleusercontent.com/DfAxDz_I3JvFm4Rw8vatkQWGRtqpcU6ro6kPzl6L_Xua0vJUlxlSJj3hvIx9jylwKHMzJ9SsC-BOFcNF94hPOgG7qR5wgFbarjGWZ_h7dBDlEZze-DayoQHLb6FXKgks1IwwA7oc" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="495" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">But this begs the question, is Janet Yellen a millennial? Is she one of those people that is constantly texting and snapchatting but cut the cord on cable long ago? </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Cable and satellite companies are picking up the slack and definitely doing their part to help the FMOC meet their beloved 2% inflation mandate....prices in this category are up 6.8% YoY. On behalf of the Fed, thank you Comcast. You are true patriotic Americans. Please continue to hike prices so we can fight those deflationista bolsheviks over at Verizon. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="310" src="https://lh5.googleusercontent.com/LR5XxNgqSYu-wf8A3spJazROF1em0sOx9HwcyspQl9V-2rMAO1qZke97yCAIwDYVBh7LYq_jMGxdN9yRhKnErFzHnnT1OAiyyRa4NpOxJw3MgJLBLMY2-r3N5N-tcWe2-v7hznCi" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="529" /></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">It is worth noting that wireless service and cable/satellite components started breaking in opposite directions around the same time….The right axis in this chart shows the contribution of Cable/Sat and Telephone to the overall CPI index (Inflation nerds: I cheated a little when I calculated this because I didn’t want it to consume my whole day...ping me if you want to get deep in the weeds). Don’t look now, but Cable/Sat prices’ contribution to the headline index is at all time highs! </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="298" src="https://lh3.googleusercontent.com/joxu2CeTk4Buuv7KW-7KjxwzwSegFcse5B-KWSwvAvRpFhERzmT1pEiZRXxGwWkrlWCkdxiwXPjY7l9XX7lWUHK2iYYMPzschaM1xe4G5VwpcO2MBC-jAFsdfHJE38rWFRE18oIO" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="509" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Here’s what we get if we sum up the two incidence components. Net -6bps contribution in the September CPI and +/-12bps for the past twenty years...Thanks for flagging this, Janet.</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="301" src="https://lh4.googleusercontent.com/ckc-ff7tefUMn2qP22sXojjMVpdnVcjdC-vHI2bm4kQdlRXfksBjM6uZDXpo4QB1IAUU8t0Ex6fFy8WmKjePE0aajZOFzuU1cepKff3ik5BmPMNRIAIOTIun9ceaw3oT1oZzTk_Z" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="510" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">This leads you to one of two conclusions: 1 ) the FOMC is clueless, and is blaming irrelevant factors for low inflation when something else is really at work, or 2) the FOMC--as an institution...not just Yellen--will continue to “look through” recent low inflation readings, and they are citing certain components as examples for what is giving them the confidence to do so. The data in the underlying inflation gauge and the drumbeat from Dudley backs that theory. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br class="kix-line-break" /></span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Yet this chart might argue in favor of the former--is the Fed willfully clueless about the drivers of low inflation readings? The Trimmed Mean PCE and Median CPI figures, which are constructed specifically to exclude noisy data, are in a persuasive downturn. Yet that is not what FOMC leadership is choosing to focus on. Instead we get “Idiosyncratic. wireless prices.” </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="296" src="https://lh3.googleusercontent.com/JeBwbOoIdij6esIZx_pIUYd7NJ-j88l0UzSXag11B9XKyvJYTDmYf-XU8i4ZE---fla_zT-I1U-p9-QuZ--AOzyRgYo1HrzjIf0BCjA5D3IdJuHlSu8EkSxn1vvhGqrZAvS78oWr" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="503" /></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Bottom line: Yellen and Dudley are looking at the </span><a href="http://macro-man.blogspot.com/2017/09/new-underlying-inflation-gauge-from-ny.html" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">underlying inflation gauge</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">, where prices are rising and already above 2%. They are looking at financial conditions, </span><a href="http://macro-man.blogspot.com/2017/10/awe-wages-picture-is-worse-than-it.html" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">they are looking at wages</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">--and while they are too smart to take the punch bowl away, they are going to continue to drain it slowly until economic data tells them they should be doing otherwise, or until the underlying gauges start to converge with headline price data.</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Perhaps it is what Polemic said, which has a certain Occum’s Razor appeal to it. Maybe they just don’t know why the UIG and financial conditions are diverging so dramatically from trimmed mean PCE and median CPI...and that’s why the curve relentlessly flattens.</span></div>
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Shawn<br />
<a href="mailto:TeamMacroMan@gmail.com">TeamMacroMan2@gmail.com</a><br />
<a href="https://twitter.com/EMinflationista" target="_blank">@EMInflationista</a></div>
EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com13tag:blogger.com,1999:blog-34323687.post-64723373384818090352017-10-13T05:40:00.001+01:002018-04-14T02:04:40.718+01:00QE Unwind and Charge of the Horsemen<b id="docs-internal-guid-0ca235a6-1404-3769-b570-ae16bcc2016c" style="font-weight: normal;"><br /></b>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">This is one of those times I am glad I am not paid by the word. I was in the car on a long drive this evening and heard the soporific tones of NPR’s Kai Risdahl going through the day’s financial results. </span></div>
<span style="font-family: "arial"; font-size: 11pt; font-style: italic; white-space: pre-wrap;">“Down day for the Dow today, closing off one-tenth of a percent.”</span><br />
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">“Down day for the Nasdaq as well, closing one-tenth of a percent lower”</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">“The S&P 500 fared no better, closing down four points, just under two-tenths of a percent.” </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Really? I mean...really NPR? Couldn’t you have just saved us all a little time and said, “everything basically unch...again.” </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">There was a time earlier this year (and for the prior decade, I guess) when I would wake up, fire up my laptop to get the overnight price action. For the past three months I just hit snooze, read the Wall Street Journal, and figure prices will come to me if they are worth looking at. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Today I spent some time thinking back to 2006 as a part of a piece I am working on about the potential downside of a victory by the populist candidate in the upcoming Mexican presidential election. Turns out markets were hustling pretty good back then! There was a fare degree of vol….but that had done nothing to shake the complacency of years of monetary quaaludes and financial accumulation. There was vol….and there was the BTD mentality...but it took until at least 2007, arguably right into the weeks just prior to the Lehman bankruptcy in 2008, before it was really all over. Investors had to have their throats slashed. There was no possibility of a soft landing. </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">“We are at a wonderful ball where the champagne sparkles in every glass and soft laughter falls upon the summer air. We know at some moment the black horsemen will come shattering through the terrace doors wreaking vengeance and scattering the survivors. Those who leave early are saved, but the ball is so splendid no one wants to leave while there is still time. So everybody keeps asking--what time is it?</span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 700; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> But none of the clocks have hands.”</span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">In late 2006 my boss taped that quote to the wall above his desk. In a good-natured act of part-mockery, part-admiration, we found a clock with the company logo on it, broke off the hands, and nailed it to the wall above his terminal. Both the quote and the clock sat in that same place in 2008 when colleagues were literally stopping at the bank on their way home to withdraw cash in case it wouldn’t be open the next day.</span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Right, so “The Great Unwind”. This chart caught my eye in the financial paper of record earlier this week: </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="399" src="https://lh4.googleusercontent.com/Pt_yTabUyt0889uLK9W3PqnCWnqJPRY_qbJimyZrLl4Au0ppO1WBz0T6Ka5mL_DckDobc079QYkp3Xm-gECnOzL9_NMyQKEsnB_LNCMl5y3gjBoTnaHNHWPJhpejvIuL7WjTYEqO" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="553" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">I would have lost a nickel on this one--I was a little shocked that the ratio of the change in central bank assets to GDP was at the highest levels of the decade early this year...and is only just not starting to come down. But look at the slope of that line...steep. We all remember back in 2012 when the Fed was ready to sound the all clear….only to see the growth and inflation go down the chute again in 2013. Perhaps the steep negative slope of monetary accommodation and the wheezing of the global economy weren’t uncorrelated events..but it is also self-evident that correlation was not forecasted by the monetary authorities in charge of the printing press at the time.</span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">So while it is boiler plate Fed-speak, it came as a mild surprise to hear the </span><a href="https://www.frbatlanta.org/news/speeches/2017/1012-bostic-balance-sheet-normalization-in-us.aspx" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Atlanta Fed Governor Rafael Bostic say this yesterday in a speech</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> on the subject of balance sheet “normalization”: </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">“</span><span style="background-color: white; color: black; font-family: "arial"; font-size: 10pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">On balance, the limited market reaction to the rollout of the Fed's new balance-sheet policy leads me to conclude that financial market participants do not view it as a significant tightening of conditions or a hindrance to economic growth….I don't expect financial market conditions to be significantly affected in the coming months by balance-sheet reductions.”</span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">There’s so much wrong with that statement I don’t really know how to approach it. In the interest of journalistic integrity, let's stick to the facts. Or failing any facts, let’s stick to what the Fed has told us already about the impact of QE on long-term rates. </span><a href="https://www.federalreserve.gov/econres/notes/feds-notes/effect-of-the-federal-reserves-securities-holdings-on-longer-term-interest-rates-20170420.htm" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Back in April, a gang of economic pirates at the Federal Reserve said</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">, “Avast, ye scurvy dogs, ye olde term premium rests at the bottom of the sea in Davy Jones’ Locker, 100 basis points below the point where Captain Ben skewered the hull of the wee ships sailed by risk-averse landlubbers.” </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Ok, maybe not just like that, they were economics PhDs...but they did highlight how balance sheet normalization will cause an unwind of their estimated 100bps in compressed term premium wrought by the Fed’s QE programs, which doesn’t even count knock-on impact from the ECB, BoJ, and BoE asset purchase programs that may or may not be wound down over the same period of time. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="407" src="https://lh6.googleusercontent.com/1-R4QvaAXuIbWxjNsc09tn4ym3dx1ReJVREUADeVFs_kx0gzS_iamgg_S4cOY_V_vKfT2sPG9BdD0kjAA6aWgwePzhDOeJZ9wzD6RU6VCJBv-tMczn2QY1eBlTB2qrENsxN0fcEe" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="591" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">I think the steam in the economy and increased supply effect from balance sheet normalization will eventually steepen the curve--right now the market has voted in favor of a repeat of 2013, where tighter conditions will lead to a slowdown in growth that will force a reversal to more accommodation.</span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The same economic wonks (the nerds, not the governors) at the Federal Reserve are forecasting a fed funds path that looks like this...</span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="363" src="https://lh6.googleusercontent.com/YBq1UgzVT5OrfL9PWq-KwXOCus1Sdc-PywsjjVeF4oftIRL9vDKwBKUth-n-FGSt39FvN8TnRxkoQBenFd2ESc6YMhLeSZbZedYTspJeGa3bvnPXvXQGJr1fD3H8xLcKj8Wc5tlJ" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="531" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The Fed governors decided to split the difference with those forecasts and those of the market in the September SEP. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="295" src="https://lh6.googleusercontent.com/uevhbH8XEno0PyLx4m2mnQezZHfY37C8pf4efBXml_8GTR7Gxonux-Vv1JmOhRU5hhWJoj3JAM80SqTi5bTTm8phtgfyqkEpJRJxVp5Wt_sTAsOjjZn8XLYf959sp5q84mbM37av" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="510" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Given the growth and wages data I noted earlier this week, and some good reasons to believe that inflation is being sandbagged by some one-off effects, I think there is good reason to price in a path close to the “dots”...say nothing of the nerds’ “dots”! </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">So yeah, I can hear Al Edwards laughing already….ice age, I get it…but his latest piece did mention that a more hawkish Fed led by Warsh would be his choice to try and defuse this credit driven time bomb. </span><span style="font-family: "arial"; font-size: 14.6667px; white-space: pre-wrap;">Yet the Fed at large, as illustrated by Bostic's speech yesterday, prefers to stay at the party a little longer. </span><span style="font-family: "arial"; font-size: 11pt; white-space: pre-wrap;">I still believe as my old boss did...you can’t defuse it...people won’t leave the party until the black horsemen crash through the window, slash the throats of the guests, and pillage the house. </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">But maybe, just maybe….a steeper curve would convince a few party-goers to call it a night.</span><br />
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span>
Shawn<br />
<a href="mailto:TeamMacroMan@gmail.com">TeamMacroMan2@gmail.com</a><br />
<a href="https://twitter.com/EMinflationista" target="_blank">@EMInflationista</a></div>
EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com7tag:blogger.com,1999:blog-34323687.post-85121441314233402372017-10-09T05:38:00.003+01:002018-04-14T02:04:17.069+01:00AWE Wages Picture is Worse Than It Looks; Why Is The Curve Still So Flat?<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="368" src="https://lh3.googleusercontent.com/zyv8TSpMPmXf-9YO_S_17FfYb-yLo9e3uExeDiRpZwZkC5D0sGYXTq4ek7K_1neJrnwbkjIaWPTMlGnVLXbDQHdncd-VGKMk--3ZlCdo6rdE30J1y4mlkV-X9kU6RudkwbJ8LtJ-" style="border: none; transform: rotate(0rad);" width="400" /></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><a href="https://www.youtube.com/watch?v=JZEIMQ42-oU" target="_blank">“Down Goes Frazier! Down Goes Frazier! Down Goes Frazier!” --Howard Cosell</a></span></div>
<b id="docs-internal-guid-33b6ef61-ff68-d681-3105-d16db56c99bd" style="font-weight: normal;"><br /></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">I used to have a colleague that would giddily exclaim, “Down Goes Frazier!” anytime he was short a bond that flashed, “HIT” on the broker screens. Since he was pretty good at his job, it became so ubiquitous on the desk that it was easy to forget where it originated. </span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Those of us that grew up in the 90s remember George Foreman as a lovable middle aged man that made a living beating up mediocre boxers and selling indoor grilling equipment. But in the 70s, he was a total badass. Foreman pummelled the champ into virtual submission, knocking him down </span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">six times</span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> before the ref stopped the fight midway through the second round. </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">So that was the phrase that went through my head when I saw that </span><a href="https://www.wsj.com/livecoverage/september-2017-jobs-report" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">negative NFP print</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">. The unthinkable has come true….A seven year streak of positive prints is over. </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">An awful number, even looking through the noise from the hurricane? Not by a long shot. UE continued lower, indicating there was no easing of labor market conditions. More importantly, average hourly earnings grew faster than expected, and continued a trend higher that has been intact since early this year.</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="289" src="https://lh3.googleusercontent.com/3QFNRxNzL5e5zGjEr03ktyMYFfiX5DoHSFt1UbKpDpfC8ETYKT9YEWbzp3FN2txF-E1Vb_Gg3g9MGWRgyID--VyDBY6lL0Mv4Tv-wUJbQXeeIwk7q0lsQqMgERagPyddFETMG7qH" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="480" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">I’m always a little suspect of YoY numbers since they are by definition dependent on what happened a year ago--a look at annualized AHE over the last three months, seasonally adjusted paints a rather surprising picture: </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">.</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="289" src="https://lh5.googleusercontent.com/L1MEvILxj_s5EIxqL_Pm0Tyz7zHVSr2LlYaMmC6aHsTMwik1-7phO7t7cZLLWIuqKWHk4uXQRT5lj7uobIEQ5CTj4PbwrDfrSHAcRRCtacE4-fd7ad2ftW-fw5HLa-AFTJQwbWPz" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="480" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Pretty clear picture there. Three periods of recent history--2010 to 2015, when wages bumbled around 2%....2015 to early 2017, when they bounced around 2.5%. </span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; vertical-align: baseline; white-space: pre-wrap;"><b><u>Now one could reasonably infer wages are set to find a new range at or above 3%. </u></b></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">And yes, the Fed has hiked interest rates, and has the torpedoes armed and ready to deploy in December. Yet the curve remains amazingly flat--no doubt in part because of this year’s low headline inflation prints implying we may be near the end of the economic cycle. But with the recent prints in payrolls/wages and some good arguments for why headline CPI is understating financial conditions, </span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; vertical-align: baseline; white-space: pre-wrap;"><b><u>seems like 2/5s should be a little closer to the steeps than the flats, when there is little evidence the Fed is going to waterboard the economic recovery with an aggressive hiking cycle.</u></b></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="280" src="https://lh3.googleusercontent.com/IqldZspdq4SioFS3lJYRdr0snul_so4SaBTYQBPe1Ohk8uorVLzsl0eRS2YjzH0zGEj60yDbIerisBPLo25XKjFcEEUV227PZk1NH76sMaUIRoWWVdUKtF0Ji4FkmuXlq2npP2oz" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">And we all know what USD has done this year--until the past few weeks anyway. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="262" src="https://lh4.googleusercontent.com/Dyp4I6d1tkWOk_KjGo628xnEt1Yz1uoH1D2OFmIaGWHRgnVRRqJlqTSEUzP_bRtx4IDgzwp-plwzUp-XieT7r0asUnBjZwU8iIA_TRsvNYtDMiSZCBhtjqaiW50Ds9OD1w6aFED5" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="606" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Why does the curve refuse to steepen? This chart is from Kashkari’s diatribe last week. The FOMC’s most dovish voice says, </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">“</span><span style="background-color: transparent; color: black; font-family: "merriweather"; font-size: 12.499999999999998pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">I believe the most likely causes of persistently low inflation are additional domestic labor market slack and falling inflation expectations…..I will argue that the FOMC’s policy to remove monetary accommodation over the past few years is likely an important factor driving inflation expectations lower.”</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="305" src="https://lh5.googleusercontent.com/j_kXnqqnruhvoxL9JVga_8b7QqcFbPUtW-Bwak744SGIMECOXbXHNgTCm510tRn-y14JnjTNooxEXZ_wOg8Pf7vAT1GrSuPfXLQrBPn0GpSshzk_lVaTiMgPeDLpDHyaU1X-WMPt" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="380" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">I think the above evidence takes an ax to the first leg of Kashkari’s labor market argument. And the second? The clear implication is that the combination of tapering asset purchases, hiking rates, and eliminating SOMA re-investments (that is, reducing the balance sheet) has over-tightened monetary conditions. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; vertical-align: baseline; white-space: pre-wrap;"><b><u>I think Kashkari has misidentified the source of lower inflation expectations</u></b></span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">. Market-implied inflation expectations fall by definition when there are buyers of nominal rate bonds relative to inflation linkers. Without kicking the hornet’s nest of term premium arguments, the NY Fed’s ACM term premium model shows a steady if unspectacular increase in short-term forward rates with the term premium still solidly in negative territory. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="348" src="https://lh4.googleusercontent.com/CoqYsRZlPfsfPgZnwNdr4CIRI3tHycmTPo4i33U1_-dhUO8UP3if9fCK2ZFvlYwfOYsc4N33xN4Z_i6qQeeO2snHlgv0U9fs8lIvWK5mO7P4XQz_U_b-53KVejcRiog7m8IEdbzb" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="471" /></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 8pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Source: New York Fed</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The bottom line is that there is a ton of demand for assets relative to the marginal propensity to consume. Global investors want to buy more long-duration assets relative to the quantity being issued by either the government, or corporate borrowers, forcing down future returns. That doesn't </span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><i>foreshadow</i></span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> lower inflation. It </span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><i>illustrates</i></span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> easy financial conditions.</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">That demand for assets extends not only to foreign corporations and individuals, but also to central banks. Remember a year ago when smart people we saying there was a floor below which the PBOC’s foreign reserves could not sustainably fall? If it ever existed, it is nearly $100 billion in the rear-view mirror now. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="232" src="https://lh4.googleusercontent.com/buX-AmF5wcIeSK2X9SFwpSUjhalLd3ZsDW7DjvD1ls2Y7T2dQvPWqbAqRG1vNi0he5w9wNzMbkZPP5pR_j7fz5Ub5fTb2ys7Pghe72ZRXwftuRa8IjTAeHC4l9EPdwydbzj8PirL" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="602" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">And the Chinese aren’t the only ones--the US current account deficit combined with resurgent manufacturing demand has put foreign central banks into overdrive to limit the appreciation of their domestic currencies. </span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; vertical-align: baseline; white-space: pre-wrap;"><b><u>Foreign central banks have purchased roughly $200 billion of treasuries this year.</u></b></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="240" src="https://lh5.googleusercontent.com/Nwj7AW0_yB-PKw3bmdCIz6hZvwpc_HwQxj8AWGvHXk6hp9An68qkHyZ1ZgnotM8cORsetLqf_cQ9Q6yCH3XW7-C0kmXbRXu3QldlThwg8RrzOJPbSh7EcHgZHd0g0Da9cRh72sdd" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">One might think that reflected a global interest in buying US Treasuries--but </span><a href="http://ticdata.treasury.gov/Publish/mfh.txt" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">foreign private investors have added a modest $24 billion this year</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">. </span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; vertical-align: baseline; white-space: pre-wrap;"><b><u>Any chance that money is going into spread product???</u></b></span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="280" src="https://lh4.googleusercontent.com/_hgb2jkGdJ-YI31rg3wtrjgwFkucSAuuoMHjEmKCrZf0qW8vx7rCFbgpTodRF4wyBMyC6pT-LM5QScwtcgme0YL_f2ZUHnD1FSGejIMa1FaesJ5nQJocfjlj-KDTyTWYbcuSAfDr" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Which brings us nicely back to this: </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="526" src="https://lh3.googleusercontent.com/g2-hFAiYwPc291v5e7W9ZxcIdUQPMN8qhYclbWUUF_ylaP9uJ1x9Qdowhnym9Q7wydfRzwfbE_HAiEVPf2usZOn0eeSE1S8nkbmWupmhtJhYNChTxRCgvRgiDQDTQD7ewQJzAQAj" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="400" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The Economist gives us about one of these per year. It just shouts out “contrary indicator”. Twitter practically had kittens. </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Take the time to </span><a href="https://www.economist.com/news/briefing/21729988-low-interest-rates-have-made-more-or-less-all-investments-expensive-bubble-without-any-fizz" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">read through the article</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">, it’s actually pretty good. They go through a number of arguments for how we got here and what might happen next. Only one did I find rather dubious--the suggestion that we are near the endgame because there are more people in developed markets starting to retire, and as they burn off assets real interest rates will be forced to rise. </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">That ignores billions of people in emerging markets. Not only are they in a better demographic situation--</span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;"><b>they are living longer as their standard of living increases</b></span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">. </span></div>
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<a href="http://www.frbsf.org/economic-research/publications/economic-letter/2017/september/demographic-transition-and-low-us-interest-rates/" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">A recent paper by the San Francisco Fed </span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">shows that it is actually life expectancy rather than demographics that has driven real rates lower over the past thirty years.</span><span style="font-family: "arial"; font-size: 14.6667px; white-space: pre-wrap;">That means as people in EM countries increase their living standards, they are not only making more money, they are hoarding more of it in anticipation of living a long and fruitful life, which pushes global real interest rates lower.</span><span style="font-family: "arial"; font-size: 11pt; white-space: pre-wrap;"> More on this subject later this week. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="299" src="https://lh5.googleusercontent.com/bUG-86dPQpzYrf5TGLc-s-FfnzYrBN9_5Ou81aL3SMBY-DeomseJJ4llrs7SCiNqRceSoPZR7crSWBP7KaEk3q4x37c_kcErGP_9HjDlnxBbdEqd3Ze1mlOEMUoZ7R0dEGDvprtG" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="451" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">We can parse this market in practically any way we like--bemoaning the lust for </span><a href="http://macro-man.blogspot.com/2017/07/yield-hungry-yield-hungry.html" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">cov-lite, sub-investment grade bonds</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">, </span><a href="http://macro-man.blogspot.com/2017/06/economist-riff-of-week-argentina-100.html" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Argentine bonds with comically long times to maturity</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">, </span><a href="http://macro-man.blogspot.com/2017/07/repost-nassim-taleb-thanksgiving.html" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">levered short vol positions</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">, or </span><a href="http://macro-man.blogspot.com/2017/07/its-106-miles-to-illinois-pension-fund.html" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">private equity</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">, but at the end of the day there is a ton of money chasing assets, and not enough scary stuff happening in the world to convince them to change course. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">History tells us these trends don’t end well. But we don’t know when the music stops. The Fed doesn’t want to be the villain that breaks the market--but there’s a ton of evidence I’ve noted here that argue financial conditions are too loose, and </span><a href="http://macro-man.blogspot.com/2017/09/new-underlying-inflation-gauge-from-ny.html" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">even by its own measures, core inflation isn’t telling the whole story. </span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> I just can’t get away from the memory of 2004-2006, when the fed hiked 25bps every meeting for three years and still armed the greatest financial weapon of mass destruction history has ever seen.</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="295" src="https://lh5.googleusercontent.com/08Ra6h8o8WWAigrdpzMosEseWf4GWf_ik8og0JWuZI3KMWZHdopVTN5BD6rhl3WpEqwJmjOn7jACp-G69OwACPKO_pxzW6m-gv6qaB_f4MBaHv3c9jdal0H3DC_Mt9VPsJ4azhYg" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="369" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">To the Fed Governors...I know you guys love your jobs but look at your own numbers...to borrow from Reagan…”Doctor Yellen, Steepen this Curve!” </span><br />
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span>
Shawn<br />
<a href="mailto:TeamMacroMan@gmail.com">TeamMacroMan2@gmail.com</a><br />
<span style="color: black; font-family: "arial"; font-size: 11pt; font-variant-east-asian: normal; font-variant-numeric: normal; vertical-align: baseline; white-space: pre-wrap;"></span><br />
<a href="https://twitter.com/EMinflationista" target="_blank">@EMInflationista</a></div>
EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com19tag:blogger.com,1999:blog-34323687.post-36188370466001246692017-10-05T21:51:00.000+01:002018-04-14T02:03:43.244+01:00So What's The Trade, Ponch? Steepeners, Mi Amigo<div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img alt="Chips in the late 1970s and early 80s" height="450" src="https://lh6.googleusercontent.com/Quwhbm1uoxpNTOxtsykmarTalXZhQ30jYi2bokMaMwi3tfiX5BccBWi9-5aXmWPjMPU3LNMY0yZiF3dqxLy_mFBi5KFvLK3OkhfcLRsZctLoNGVC6ySDX4DjLG78mJan5ZloOuEb" style="border: none; transform: rotate(0rad);" width="375" /></span></div>
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<span style="background-color: white; color: #222222; font-family: "arial"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Ponch...if we get there in time, we can put that hawkish central banker behind bars once and for all!</span></div>
<b id="docs-internal-guid-f102a195-ed12-5a74-5c87-e427a10dae5b" style="font-weight: normal;"><br /></b>
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<div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: white; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">So what's next for Mex rates? Can Ponch use his street smarts to subdue inflation, capture the gang of hawkish central bankers and bring joy to the hedge fund world? Indeed, </span><span style="background-color: white; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 700; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">the next move for Banxico is a cut</span><span style="background-color: white; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">. </span><a href="http://macro-man.blogspot.com/2017/10/inflation-is-on-holiday-in-mexicobut.html" style="text-decoration: none;"><span style="background-color: white; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> </span><span style="background-color: white; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">As discussed yesterday</span></a><span style="background-color: white; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">, there is probabilistic path for rate cut, with 50bps gradually priced by the end of 2018. 100bps is in the cards in 1H2018, but it won’t take much to convince the central bank to hold off or slow-play rate cuts to see how the election pans out.</span></div>
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<div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: white; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">To complicate matters further, we don’t even know who will be running the central bank in 2018 (on either side of the border). The two leading candidates are </span><span style="background-color: white; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 700; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Alejandro Díaz de León</span><span style="background-color: white; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">, who is currently on Banxico’s board of governors, and </span><span style="background-color: white; color: #222222; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 700; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">José Antonio Meade</span><span style="background-color: white; color: #222222; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">, the current finance minister. Both are eminently qualified--one could argue Meade is the more dovish of the two, but he may wind up running for president under the PRI banner.</span></div>
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<div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: white; color: #222222; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">If Diaz de </span><span style="background-color: white; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">León</span><span style="background-color: white; color: #222222; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> is the choice, plenty of influence will be held by </span><span style="background-color: white; color: #222222; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 700; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Manuel Ramos Francia</span><span style="background-color: white; color: #222222; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">, Banxico’s current vice-chairman and Mexico’s answer to Stanley Fischer. Ramos Francia places a high premium on financial stability, and together with Carstens can be credited with implementing a number of measures to backstop the Mexican currency and financial system over the past ten years--up to and including the aggressive hiking cycle that took rates 400bps higher since early 2016. </span><span style="background-color: white; color: #222222; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 700; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">That could keep rates higher for longer, especially if the Fed is still hiking in 2018.</span></div>
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<div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: white; color: #222222; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Lastly there’s NAFTA. I don’t have anything to add here. I still see little evidence Trump is going to blow up the system--if he were going to do it, he would have done so already. But this time bomb will only be defused by an agreement--one that doesn’t look on the horizon...and the Mexican election clock is ticking.</span></div>
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<div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: white; color: #222222; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Which segues nicely into the biggest risk in the market: Victory in next July’s presidential election for </span><a href="https://en.wikipedia.org/wiki/Andr%C3%A9s_Manuel_L%C3%B3pez_Obrador" style="text-decoration: none;"><span style="background-color: white; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 700; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Andrés Manuel López Obrador</span></a><span style="background-color: white; color: #222222; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">, a leftist candidate that is a weird combination of Donald Trump, Lula and Jeremy Corbyn. AMLO has a small lead in a race that will be splintered between four candidates.</span></div>
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<div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: white; color: #222222; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The trouble is...</span><span style="background-color: white; color: #222222; font-family: "arial"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">I think he’s going to win</span><span style="background-color: white; color: #222222; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">. Sure, he could step on a political landmine as he has in past elections, but the recent global record of populist candidates versus either establishment or technocratic candidates is not good at all...Macron might be an exception, but even he was an outsider running against the establishment. Mexico has all the ingredients for a populist/nationalist victory: a charismatic candidate, an external bully, a stagnant economy, a system rife with corruption, and a long history of poverty, inequality, and large segments of the population that feel “left behind.”</span></div>
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<div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: white; color: #222222; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">In 2006, Mexico had a long string of strong growth resulting from high oil prices and strong manufacturing demand. Felipe Calderon ran a technocratic “don’t mess this up” campaign, and still only beat AMLO by a whisker (and some think that is overstated by two whiskers). Today, from a political perspective (corruption, crime, education, etc.), pretty much everything Mexico had going for it in 2006 is worse. And AMLO is still here and ready to “drain the swamp”. How will the fractured establishment compete with that? </span></div>
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<span style="background-color: white; color: #222222; font-family: "arial"; font-size: 11pt; font-style: normal; vertical-align: baseline; white-space: pre-wrap;"><b><u>The market is underpricing the potential for inflation to come down...yet also underpricing AMLO risk.</u></b></span><span style="background-color: white; color: #222222; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> </span><span style="background-color: white; color: #222222; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 700; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">That points to good value in steepeners.</span></div>
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<div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: white; color: #222222; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">2x10 TIIE is still really flat--and while that may be true of virtually any curve in the world, there aren’t many curves where one can make a convincing case for significant rate cuts in the next 1-2 years. The flat curve is also a function of EM local flows at large--a portion of which can and will hit the exits if and when AMLO extends his lead in the polls. 2x10s is currently at 9bps--three months from now 40bps is much more likely than an inverted curve. </span></div>
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<a href="https://lh6.googleusercontent.com/CWGpApnSK0w4kbw7A2IC_tmh9mfBVVlMpV7acQVyfgWklIAKjUaa40K0RkCz3MCK63tqDKOkY6T-GkQvZCQi_Niwl6TqOpOTW0sBSUQ0fP_WfYSBdHIVBY1ts4FNDP7iZp9Hm5a8" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="280" src="https://lh6.googleusercontent.com/CWGpApnSK0w4kbw7A2IC_tmh9mfBVVlMpV7acQVyfgWklIAKjUaa40K0RkCz3MCK63tqDKOkY6T-GkQvZCQi_Niwl6TqOpOTW0sBSUQ0fP_WfYSBdHIVBY1ts4FNDP7iZp9Hm5a8" style="border: none; transform: rotate(0rad);" width="624" /></a></div>
<span style="background-color: white; color: #222222; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">In a directional or long-only book </span><span style="background-color: white; color: #222222; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 700; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">it is tough to ignore the risk-reward in buying the front end</span><span style="background-color: white; color: #222222; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">. At roughly 7.10 in 2y tiie vs. the 28d fixing at 7.36, you’re staking 20bps to make 50-60bps if Banxico cuts 100bps by mid-2018. Yet I can’t help but think there will be a better chance to build a structural position as the election campaign gets into full swing, which also allows you time to let some of that negative carry/roll burn off. A decent compromise would be to receive in front of potentially positive hard data, while keeping dry powder on had to add on spikes driven by politics or USD strength.</span></div>
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<span style="background-color: white; color: #222222; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">There you have it...Stay safe out there!</span><br />
<span style="background-color: white; color: #222222; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span>
Shawn<br />
<a href="mailto:TeamMacroMan@gmail.com">TeamMacroMan2@gmail.com</a><br />
<span style="background-color: white; color: #222222; font-family: "arial"; font-size: 11pt; font-variant-east-asian: normal; font-variant-numeric: normal; vertical-align: baseline; white-space: pre-wrap;"></span><br />
<a href="https://twitter.com/EMinflationista" target="_blank">@EMInflationista</a><br />
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EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com13tag:blogger.com,1999:blog-34323687.post-5106692408144808212017-10-05T05:06:00.000+01:002018-04-14T02:03:21.287+01:00Inflation Is On Holiday in Mexico...But Set for a Big Hangover<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="351" src="https://lh6.googleusercontent.com/dZL9C5mYyThVfHVJAkArEtQYJuDeWLJ9DM4hHJ6Ud1UXNpMC3cIqChJr9FVVti3XCj5U4Ppdae0jtoCsGl4jeU0TTXgezOIQ1Lp7ia2EdIe9_JzroMAEbpq27xtREn587zd3Gkjh" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">I loved watching the Six Million Dollar Man when I was a kid. On the playground we would make that cool sound he made when he ran really fast or lifted a truck off the chest of a helpless victim. </span></div>
<b id="docs-internal-guid-f102a195-eaaf-0734-756a-8bbd60b3695f" style="font-weight: normal;"><br /></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">We can rebuild him….We have the technology….the budget is limitless….crazy money...six million dollars of the best cyborg-tech money can buy. </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Indeed, inflation is a thief in the night. Six million dollars certainly doesn’t go as far as it used to...and even less so in Mexico, where inflation is running well over 6%. </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Yet there is light at the end of the tunnel. The front end tightened 30bps early this summer when Banxico went on hold (gratuitous self-promo plug <a href="http://macro-man.blogspot.com/2017/06/make-mbonos-great-again.html" target="_blank">here</a>, and <a href="http://macro-man.blogspot.com/2017/06/what-i-think-about-when-thinking-about.html" target="_blank">here</a>), which coincided with a most joyous period of EM enthusiasm--MXN strengthened about 8% from May to late June, which gave traders the ammo to price in cuts in the overnight rate. Since then, vol died and both MXN and front end rates have been largely range bound. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="285" src="https://lh3.googleusercontent.com/5dKxyLjcXXBosdKGW6kM9Yp-pJ8orQZeAZ6oSVbgOCV7VQE-odr5rzuibBTgL06lnCi-kuDwdL4er2bVVjc3ffPlz8SznMuGsSQIcCkjbXBRUUbFz7kqt9A9SXjLk_4eUowvHcKg" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="488" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The market has agreed on a probabilistic path for the overnight rate--gradually lower rates consistent with the belief that Banxico will cut modestly sometime in 2018. Given risks around the election, this can be summarized as a roughly 50/50 chance of cutting 100bps or staying on hold. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="211" src="https://lh3.googleusercontent.com/SZEmXJJT0fERBukHqZLmzWevmYr7c1vat2sNMpq0Fec6MvLp5P-oZGuBcQ4TPb1BLybCb14UWQlSjeslmEav_d8uck2YPh4ZTiph7P_chGHFGWFSVpipTy4hBnpDc0_d9NDLE1GS" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="411" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">But inflation is 6.66%, higher than most people expected earlier this year (myself included). Year end expectations are still stuck at 6.3%.</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 700; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="319" src="https://lh4.googleusercontent.com/S9Oet6J1-niVmm9aqw7Zin-F5hI1h4lIL0kTpqd3W43GFDtBXHjWKezj2WqanwP6oIEF2tR81djOMDaH_uMNxTEsgCUebjBkggCc29Mni8lzlhlRsSHs0QJRWOo3nqa2cPX6rqdY" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="361" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Yet several factors are foreshadowing a steep decrease in inflation in the coming months: </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 700; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">#1: PPI is a leading indicator for lower headline CPI.</span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> PPI saw a dramatic increase earlier this year that was primarily driven by increases in energy prices and the depreciation of the currency in 2016 and early 2017. Those factors are mean reverting and will likely seep into consumer prices in the coming months. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="288" src="https://lh4.googleusercontent.com/mISj74ivsH_TzTOdodUl4_aJUfLYIO3-X8dAyY2B7L3Vm7OmuxPLs4wfZ770bTxl8Ta99WXu0-SbDlj3fGJDyKtQJ8Yt1dqb33P5rbMZ6LpbBEICOgte-FgElQy1TJabcC2IRVQ0" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="480" /></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">2) </span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 700; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Trimmed mean CPI is already falling from unspectacular levels</span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">, and the gap between the core/trimmed mean indices and headline has gotten even wider after the gasoline price hike in January.. Another positive leading indicator for headline CPI. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="288" src="https://lh4.googleusercontent.com/f_woBdY_jgEZNZvXzpnHBcHUZnRcWFIEtS1snzvyPtjUL8hwpIkLyKKJFzTSqeEfbcPxVyFpmDDV7jsKEMhQJIq4s2lFqvuu6CXeihe5cIZ3v8tCZ0KNRwaybJx_RUgP-t2MlyZe" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="480" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">3) </span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 700; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">The recent price hikes in non-core products have not pressured wages higher.</span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> These charts show the negotiated wage hikes (left) in the private, public sectors and overall (the red, blue, and green lines, respectively), and the average salary hikes in the formal sector (right). In each case, there is little to suggest there is any second round impact on wages due to high inflation, and real wages are well into negative territory. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="235" src="https://lh3.googleusercontent.com/kz8-DHjHxZ_rnwP4f3c_Uxxo0rXJhb7vQfsU6uWuyw9_W96K0tzdqf4W09SLS0P3CvtDItUQxMb60_F8VG49HFMc5Kx6qOzu2BtZUl7BS1ydYSX7Bs0tw5_iFXAkss_6SC1ZRyWw" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="206" /></span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="236" src="https://lh4.googleusercontent.com/0qjHQlpDYQpHVHuxZzHhQppublxyxmvlH0KU9FHAO2wxiGjaoAt108GhATqhxtPEm65-yfyn8PISzc1ZOqUP2K_qCrpwFgRxag2UBVAuvL7q5hLMAt67_uExl1y7R16FwgPRJ7vV" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="230" /></span></div>
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<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Indeed, unit labor costs have been falling as well (although not as fast as they have in the past)</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="341" src="https://lh4.googleusercontent.com/yHfYo4ZDdqlr0XZ8vmOMGAebIMD3Zj3PB0bLJiPzdU4VY_wvYkCXigNCGeRvpGCRW0YZ3qEeFwkj0bdyQ0ZAvwI1NE4P4vYoGoDQzRtFmKmM8dFSjb101Jk0UR4UkcOti9I8jAZM" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="361" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">4) </span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 700; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">There is still a negative output gap</span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">--while Banxico’s forecasts are more optimistic than they were earlier this year, there is still no positive slope that would portend demand driven inflation pressure.. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="352" src="https://lh3.googleusercontent.com/hN5tcmGu0yWLQlMtr0d27tugz8LdGSLxVNWrqJ-W70WchM62DUjmCHGRa95_PLXx3JxoHoG9uHuwtbdN01UCkZuVeL8hMRmsgyuWSMTTW3R0lNagst9Kj6NNIgILqMv74yAAJgfA" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="358" /></span></div>
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<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Negative real wages, a sluggish economy, and a negative output gap gives the central bank scope to cut rates--if inflation allows. Banxico is more optimistic than the market--and their previous forecast-- about inflation falling quickly next year. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="275" src="https://lh5.googleusercontent.com/2lRNZXQ7Ie3cVOMtQ3ous3XaVmAktghZUgY0bmxSxoB1Kud7Mjn6R-EpyOBLR1AZaTDSxYJ8gLqoKpwKsHErGGeceEB34zCc-oMPX0jN84eWt7mrSwjB9oHY7PNqG_FvQTOM8w72" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="564" /></span></div>
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<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">5) </span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 700; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Product level analysis shows no evidence of second round effects--in fact, underlying inflation may be overstated at current levels. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">This is the YoY change in inflation and attribution of underlying sub-indices. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="345" src="https://lh6.googleusercontent.com/VirvKhmaaCGv-u5gXYaG8PGnjeSh9mkr8-DcWU-rkuqEfz0IjK4jn1Kw2oDUga3CUSdbKtahrgfDS_35ANzXnbdReLq6_LieXCqjDn3Tvjf1065nCPlqD_tB_u9WZQmAfrEElxcA" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="474" /></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> </span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Even a cursory look will show the brutal jump in perishable fruit/vegetable and energy prices. These two factors alone, which comprise only 12% of the index, contributed 30% of the increase in headline inflation. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="442" src="https://lh6.googleusercontent.com/td8kUzeR4HpkCtuRW1UXVUSBTBXQZhEOZ2wtB-_YEj7sZPJwktzNgNtNR5-Iv-F54qKNOon2JWXP47keU33yLh_0lEQed0LhinU143CY5ZULa4E39QBdrmW-AYD--tEu9umQNIBF" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="472" /></span></div>
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<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The top 20 products ranked by their incidence in the index over the last year shows just how large the impact is from one-off moves (gasoline, bus fares, “collective”, which are ubiquitous transport vans like the airport "Super Shuttle" in the US) and crop-failure style food price hikes (tomatoes, potatoes, onions). Meanwhile, </span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 700; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">components that would indicate a frothy financial system like shelter (“own home”, in the literal Spanish translation) and rent are well below the 3% midpoint of the inflation target.</span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">6) </span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 700; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Merchandise inflation is high--but driven by imported goods...and MXN fuerte!! </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Yet another component stands out in the data--</span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">non-food merchandise</span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> has moved up significantly as well despite the low underlying wage and growth data. Just as important, drilling into the data from Jan-Aug 2017 (thus, after the gasoline price hike) shows these prices have been sticky, moving up at an annualized rate of 5.6%. Is this evidence of second round effects? </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">I continue to believe the answer is no--product level analysis argues this is being driven by the lagged impact of the depreciation of the peso. This is the ten highest contributors to non-food merchandise inflation in the Jan-Aug 2017 period: </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="331" src="https://lh3.googleusercontent.com/MaWMObStXOjqOVun7TBftQOdt0bPK8te927iUNmYe3h3t7EJ9GLI5YyW1TGSgvKmF5PVE3Ircv6h2jskdCDyiTi_mmujYytn9fKyt_o1L7SDVoD_lyBhlq2DW79Bl7xV4kw99t5f" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="473" /></span></div>
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<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 700; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">What do these products have in common? They are mostly imported goods.</span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> Given the rally back in the peso in the first half of this year, and the stability/low vol more recently, </span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 700; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">price increases in this group are set to mean revert and will likely settle in around 2-3%, which could lead to a 40-60bps negative contribution to the headline index.</span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">7) </span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 700; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Services inflation is high--but driven by food inflation</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Services inflation hasn’t blown out either, ending August at 3.7%. In fact it never cracked 4%--another indication that underlying inflation pressures are subdued. Services inflation has indeed increased, but it is coming off a low base.</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="327" src="https://lh5.googleusercontent.com/UHfnJuAt_4s_ZsqR7oyVpJMHUAYV_4vypfI5qR5m9D7tQry0NhMy4xS1VIjx9bImKbsDZnM1sO06o8WNjUCxIXjYiF5d5LDYvTn8c7rKIT7z_AQMCUNGJq13wAnC9fTIsu0rMdlu" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">If we take a look at the top contributors to services inflation, a couple of things stand out. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="293" src="https://lh4.googleusercontent.com/NRfHspm8SkGzeYbUb4ydqjTmAVVx_qlfICiFbDkM64-eZ8UGtuEQ3beEM1vQOQrVV8hj4PQSzSr92QI7VP3UVfCV1t-Dg4cDD0-vyIfhGhe55tgOAsCQvn5yjGL7ecyv4tkB0pFT" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="469" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">If we ignore the dreaded haircut inflation, the two big factors were are “taquerias” and restaurants, where prices have gone up over 6% and have contributed nearly 50bps to the headline number. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">What to take a crack at why restaurant prices have been going up? These are the 5 products with the highest YoY price increases: </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> </span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="124" src="https://lh3.googleusercontent.com/JKmZr6yVNFw16ORap4oAl36ZMR_NfKrBw1DaGGTobPJ8xsuVbpn77NHfYYSPT5_VJf1dacOVZScAj0tynbHLz8MLv3Zqq7q5Zlms57bB0wnFz9_1u7CxIa6_7JKyynqIz4kw9kfI" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="406" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">At risk of perpetuating a cultural stereotype, they use a lot of this stuff in Mexican restaurants... </span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 700; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Mexico is in the midst of a Guacamole Crisis!</span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> If I were AMLO, I’d use that squeeze on small business owners to whack PRI like a….ah, I better not. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">And restaurant owners got no help from beef and chicken prices, which were up 5% and 10% respectively. </span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 700; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">The secondary impact of headline inflation is being felt in very transitory, competitive sectors</span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">--and underlying inflation is practically non-existent. These price increases are going to roll off, and competitive retailers amidst tepid domestic demand will lower prices. </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">These micro factors will combine with high interest rates, fiscal tightening and a stable peso bring further confidence in the credibility of the inflation regime. Putting all those factors together, inflation can fall below 4% in Q1 2018, well before what is currently built into sell side inflation surveys.</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Stay tuned for what is all means in part two tomorrow...along with a sweet CHiPs reference.</span><br />
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span>
Shawn<br />
<a href="mailto:TeamMacroMan@gmail.com">TeamMacroMan2@gmail.com</a><br />
<span style="color: black; font-family: "arial"; font-size: 11pt; font-variant-east-asian: normal; font-variant-numeric: normal; vertical-align: baseline; white-space: pre-wrap;"></span><br />
<a href="https://twitter.com/EMinflationista" target="_blank">@EMInflationista</a><br />
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EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com7tag:blogger.com,1999:blog-34323687.post-72807083180439865512017-10-02T22:05:00.002+01:002018-04-14T02:02:33.155+01:00Political Risk in Spain--Changing the Narrative<div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">I’d love to continue the great inflation debate of 2017, with more and more charts and links to arcane central bank papers. </span></div>
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<b id="docs-internal-guid-826ec7f5-dee3-f0ea-2583-8ee512a543fb" style="font-weight: normal;"><br /></b></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">But wait, there’s more! </span></div>
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<b style="font-weight: normal;"><br /></b></div>
<div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: #333333; font-family: "times new roman"; font-size: 24pt; font-style: normal; font-variant: normal; font-weight: 700; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">“Eurozone Inflation Points to ECB Caution on Quantitative Easing”</span></div>
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<a href="https://www.wsj.com/articles/eurozone-inflation-points-to-ecb-caution-on-quantitative-easing-1506680211" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 12pt; font-style: italic; font-variant: normal; font-weight: 700; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Wall Street Journal, September 29, 2017</span></a></div>
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<b style="font-weight: normal;"><br /></b></div>
<div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: #333333; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Good grief, can someone drive a stake through the heart of this inflation theme?!?</span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<b style="font-weight: normal;"><br /></b></div>
<div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: #333333; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">As if by magic, Trump’s tax plan and the Catalonia gonzo-referendum charge into the macro fold to fight with the Fed and inflation for breathing space in the minds of investors. And don’t forget the German election could portend a stronger fiscal easing with the Greens and FDP joining to push for more spending and tax cuts…Merkel might be the world’s only political leader that needs convincing to spend a budget surplus to strengthen an electoral coalition, but I think it will happen. </span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<b style="font-weight: normal;"><br /></b></div>
<div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: #333333; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">By contrast, I’m skeptical on the Trump tax plan--not only on the execution, but also on the growth implications. There simply aren’t enough grown-ups writing this bill to craft something materially growth positive for an economy like the US. The attribution of the selloff in rates over the past couple of weeks can be shared by the FOMC and tax reform, but I don’t think the market is pricing in faster growth or higher deficit spending so long as 5x30s is still stuck in the basement. </span></div>
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<b style="font-weight: normal;"><br /></b></div>
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<span style="background-color: transparent; color: #333333; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Given the way fast money ripped FVZ7 coming out of the fed meeting, I thought we’d see 5x30s grind higher….but no! </span></div>
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<span style="background-color: transparent; color: #333333; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="240" src="https://lh4.googleusercontent.com/Gk-o9GtS2h-unzXmhLKA8KgzupFC2JK3I-lkSbnKunHjWYhD9QqTl4-NpaGtE_re05b69IANKat9ht37RWF60-TwP6ohJYFCDcpLujVqqu--bzUTgDeiGqAhsyff3DKhhNnalY_U" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="481" /></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<b style="font-weight: normal;"><br /></b></div>
<div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: #333333; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Circling back to Europe, the combo of the weak inflation data and increased political uncertainty after the Catalonia referendum will put a cap on the strong EUR theme for now. </span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<b style="font-weight: normal;"><br /></b></div>
<div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Rajoy clearly overplayed his hand, but it is far from clear what the next step will be. Political deadlock and delay seems to fit for Rajoy--and while this was a victory in the media for the Catalan independence movement, it isn’t clear what the next step will be. Will the Catalan leadership throw gas on the fire and declare independence, as promised before the referendum, and </span><a href="https://www.bloomberg.com/news/articles/2017-10-01/rajoy-says-catalan-ballot-is-void-defending-police-crackdown" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">suggested by Puigdemont today</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">? </span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
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<div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">That would be a big sell signal for peripheral spreads and EUR. Time will tell, but I don’t believe the “strong Euro” trade will take the spotlight again until there is a political solution and/or economic data to change the narrative. That could be good news for EMFX, since an increase in political risk amidst continued positive global growth signals could shift more of those RM flows into EM. </span><span style="background-color: transparent; color: #333333; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br class="kix-line-break" /></span><br />
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span></div>
<div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: #333333; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">That being said, The New York subsidiary of Team Global Macro didn’t join the "buy USD" game today. EUR gapped weaker on the Asia open and it was “sell on” to 1.175 for the London open...but then...nothing. Choppy trading throughout the day and a steadfast refusal to break the 1.17 support I noted earlier last week. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="205" src="https://lh6.googleusercontent.com/9uOeCNXPFUGvWnVHFs6KwBxOp-I0_k-Mpm0wDCFMODNFhyiybo3NNccfsfyaNfcOYVYVs_XiEEoWi-Btkw9sApU8_lSN3OqMpe5rWdu7tYOkpkmC4PoAnmHkIZNRMBZN7qaZd4Rm" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></div>
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<b style="font-weight: normal;"><br /></b></div>
<div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Yet there is plenty of space to see a further selloff in peripheral spreads, especially as the next risk-event in Europe is likely to be the Italian election early next year, which could usher in a squirrely Eurosceptic populist coalition that makes the Tories look like a poster child of political unity and discipline. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">10y bono-bund spreads sold off 8-10bps today, but still well off the wides from earlier this year. With the withdrawal of the 2018 budget amidst opposition from the Basque nationalists, there seems to be scope for continuing widening. Given the firmly entrenched BTD mentality, I’d be loath to say we won’t see real money buying, but it may take more cheapening for them to step in. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="261" src="https://lh4.googleusercontent.com/IzLQNecKY6DwpjgJeN6gwpvA5mvXFpZC4BEAlmmdhypp7fI8nyIPcKQglgCYn4Essf_mol6xp-bAjgh17EiCaXGxRP0SXfek3u7P_nYWed6R7vMukCrbt6lHXEx6HpmmXLR9xVFZ" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="569" /></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">This regression is plotting the current level from Friday’s close but illustrates there isn’t much value in Spain, even after this back up. Come to think of it, if this regression shows one thing it is probably that there hasn’t been much credit analysis going on in the periphery at large since the Italian referendum. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="248" src="https://lh5.googleusercontent.com/kmrk8G8P8qHHYCis0lZ25A-GJMHfD_cZEhals6_iHJptql_MYnnOJPMjVcgdNOgUUqvAugUPGIUIW4o1a5ipU2MO57FttPbBus54dDiIY_wye9ivEeaMevPOUvqv1z6tNhVz0b2n" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="519" /></span></div>
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<div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">As discussed in previous posts, earlier this year the strong EUR theme had the potential to have some momentum behind it, given the unwind of the structural short in the market after years of getting kicked around. A couple of charts from citi’s macro group show that theme gained traction as the European economy picked up speed while the US disappointed--that divergence in the data appears to be mean-reverting and indeed, RM flows are slowing down. That short-term technical is USD supportive as well and points to a break of that 1.17 level. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="226" src="https://lh4.googleusercontent.com/sR8-fS8JU9df2gCGb53uEWhVAgvm1EOMgEbAZb11ldetaGE87BsRHjEPN4K8_xvFO24tfljza6TcHwyqj9fgOIFFnJ0hWim16RVNthvqCskJSbSfjVxnPgw9A3EJWNvIfM7kuc4Y" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="559" /></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">In other news….just a quick “clip and link” to a chart published today by Scott Minerd over at Guggenheim and brilliantly titled, </span><a href="https://www.guggenheiminvestments.com/perspectives/macroeconomic-research/stocks-for-the-long-run-not-now?utm_source=linkedin&utm_medium=social&utm_content=macroeconomic+research&utm_campaign=stocks+for+the+long+run+not+now" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">“Stocks for the Long Run? Not Today.”</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> The expected 10yr return for the S&P 500 has dipped below that of 10y UST, which is a big negative for risk-adjusted equity returns. </span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">I noted this fact a while back in my discussion on the risk appetite, </span><a href="http://macro-man.blogspot.com/2017/07/yield-hungry-yield-hungry.html" style="text-decoration-line: none;"><span style="color: #1155cc; font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">reach for yield</span></a><span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">, </span><a href="http://macro-man.blogspot.com/2017/07/its-106-miles-to-illinois-pension-fund.html" style="text-decoration-line: none;"><span style="color: #1155cc; font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">lousy returns</span></a><span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">, and </span><a href="http://macro-man.blogspot.com/2017/07/question-for-class-what-are-unloved.html" style="text-decoration-line: none;"><span style="color: #1155cc; font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">lust for private equity</span></a><span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;"> among pension funds, high valuation by definition means lower future expected returns. Pension funds can’t wish this problem away by taking more exotic equity risk, more duration risk, or in my opinion, more exotic fixed income risk at Minerd suggests. While I agree that he is probably right about value in off-index cash flows relative to those inside the Bloomberg Barclays Global Aggregate, long-term investors need to temper their expectations for future returns and not shy away from tail hedges that will protect them in a downdraft at a reasonable cost. </span><br />
<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;"><br /></span>
Shawn<br />
<a href="mailto:TeamMacroMan@gmail.com">TeamMacroMan2@gmail.com</a><br />
<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;"></span><br />
<a href="https://twitter.com/EMinflationista" target="_blank">@EMInflationista</a><br />
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EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com14tag:blogger.com,1999:blog-34323687.post-32643485391813260332017-09-28T04:29:00.001+01:002017-09-28T04:35:14.068+01:00Soapbox: Thought Piece On The Long Term View of InflationSince inflation has been such a hot topic on MM of late, I thought it would be appropriate to share a thought piece and get some of our readers' inputs.<br />
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Keep in mind this is less not really an immediately trade-able view but rather my general musings.</div>
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From reading stories and textbooks, I find many paradoxical parallels between our time today and the late 1970's/early 1980's.</div>
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Back then, the US inflation (as a result of Federal Reserve policies and an overemphasis for economic stability via full employment) was at its zenith. Paul Volcker came out on a Saturday to shock the markets with a 100bps raise of the fed funds rate. [<a href="https://fraser.stlouisfed.org/scribd/?item_id=8201&filepath=/files/docs/historical/volcker/Volcker_19791006.pdf"><span style="color: blue;">1</span></a>] This ultimately culminated into a 4% rate increase in a single month! [<a href="https://www.nytimes.com/interactive/2015/12/11/business/economy/fed-interest-rates-history.html?mcubz=3"><span style="color: blue;">2</span></a>]</div>
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The shock to the rates market would eventually lead to inflation tapering off. But it is important to note that this takes time.<br />
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As you can see here - after the start of a dramatic shift in policy, the percentage change in inflation year over year did not top out until the end of 1980 at 13.50%. Inflation continued increasing, albeit more slowly, at a notable rate of 10.30% in 1981.<br />
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As inflation subsided, people ended up enjoying the biggest stocks and bond bull market that has more or less lasted until today. Commodities meanwhile languished within a bear market until the rise of Chinese demand in the early-2000's.<br />
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I have distilled into several factors that I believe were the main attributions in the decline of inflation and subsequent moves in prices in the various asset classes over the course of the ~30 years following 1980.<br />
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<b>1) Preoccupation with inflation. </b>When you had the head of the most important Central Bank in the world ripping rates like Spongebob ripping his pants, chances were he would eventually have some impact eventually.<br />
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<b><br /></b> <b>2) Fiscal austerity - less money spent means less inflation.</b> There are nuanced differences between fiscal austerity in different times in history, in different countries. However, it is hard to argue against the idea that general austerity should lead to disinflationary pressures.<br />
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For example, the 1990's in the US was a time of fiscal austerity - the Clinton administration was responsible for the biggest reduction in government spending as a % of GDP since the end of WWII. [<a href="https://www.csmonitor.com/Business/Stefan-Karlsson/2010/1202/Government-spending-and-the-1990s"><span style="color: blue;">3</span></a>] Since we were still growing and coming down from relatively high prints in inflation (as compared to today), the decline in inflation was viewed with a benign eye.<br />
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Another example of austerity led deflation was in 2010's Eurozone. The European debt crisis led to large cuts in government spending in a number of periphery countries that has coincided low inflation [<a href="https://www.socialeurope.eu/austerity-crippled-european-economy-numbers"><span style="color: blue;">4</span></a><span id="goog_955938963"></span><a href="https://www.blogger.com/"></a><span id="goog_955938964"></span>]<br />
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<b>3) The great deleveraging.</b> In close relation to fiscal austerity in select regions, there has been deleveraging since 2008. Both in the US and other parts of the global economy, debt to income/GDP has been on the downward trend putting pressure on increasing investment and thus inflation.<br />
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<b>4) Globalization. The period of 1980's to 1990's mark the rapid rise in global trade.</b> This shift in paradigm resulted in better allocation resources - companies are able to lower their costs in both materials and labor, which ultimately led to downward pressures on goods and services.<br />
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<b>5) Demographic pressures (declining populations) and low productivity growth.</b> As the labor growth falls in a number of developed regions, we have had pressure on inflation as a result. [<a href="https://www.forbes.com/sites/greatspeculations/2012/09/19/demographics-to-blame-for-inescapable-deflation/#682c724160ba"><span style="color: blue;">5</span></a>]<br />
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Now that I've documented how we've gotten here from the 1970's/1980's. I think there are paradoxical reasons why we about to have a shift in paradigm towards the other direction. Let's go through the same bullets one by one again, this time through 2017 lenses.<br />
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<b>1) Preoccupation with deflation (why helicopter money could emerge)</b>. We've come a long way since Volcker. Instead of an inflationary bogeyman, we have a deflationary one. The Fed, as a result, has expanded its balance sheet to unprecedented levels. Has it worked? - that's something still up for debate.<br />
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But I argue that it has the <i>potential </i>of working. QE led to an increase in the monetary base. However, that money didn't technically make into the economic system per se. Banks and governments were able to borrow cheaply, but very little of that money was actually spent to expand the economy. In fact, the unintended consequences of ZIRP and NIRP were actually contributing to deflationary pressures.<br />
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I documented this at my firm last year in April of 2016 (I think I was one of the first to make this note - I believe Credit Suisse sent out a similar note a few weeks after I sent my initial email internally):<br />
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– Squeeze on bank’s net interest margin income through the flattening of the yield curve<br />
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– Flow into non-revenue generating assets (Snapchat, bridges to nowhere, etc.) that will eventually prove deflationary as debt led to assets with poor income generating capabilities<br />
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– General economic signaling and cash hoarding occurred as the market deemed the economy to be in a poor state as Central Banks' emphasis on QE measures<br />
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Are all reasons why deflationary pressures should dominate. Due to the enumerated reasons above why deflation exists - simply increasing the money supply to create inflation (monetary policy) was not enough. You need both monetary policy (increasing the money supply) and fiscal policy (putting that additional money into the hands of end users).<br />
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Interestingly, out of US, Europe, and Japan, US came out of 2008 the best – why was that? The US was the only place where both sufficient fiscal and monetary policy occurred in coordination, albeit this was unintended.<br />
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In terms of Europe: Aside from Trichet raising rates shortly after 2008 (turned out to be a big mistake) – the ECB decisively lowered rates and kept them there – however all the talk in Europe was for fiscal austerity NOT fiscal expansion – so you have all this cheap borrowing and record low yields for core Europe and periphery but no growth/inflation because the money wasn't really going into anything.<br />
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Lastly, Japan – you saw a spike in inflation right at the beginning of Abenomics. As some of you might remember, Abenomics and the reinvigorated Japanese monetary policy started with fiscal stimulus (one of the arrows from Abe) – then they tried to lower the deficit by cutting spending and raising the consumption tax, which sent USDJPY crashing back down.<br />
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My main point here is that the world has done a tremendous amount on the monetary side to solve the deflationary problem. There is plenty of dry powder for inflation, as soon as there is a fiscal policy match to light it.<br />
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<b>2) This leads perfectly towards point #2. Fiscal austerity has put tremendous pressure on the middle and lower classes</b> - populism and the fiscal expansion that comes with it is a symptom of fiscal austerity and general income inequality. [<a href="https://www.bridgewater.com/resources/bwam032217.pdf"><span style="color: blue;">6</span></a>]<br />
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Although it is debatable how much impact our current populist officials will have (Trump, May). What is undeniable is that there is a surge in popularity for fiscal expansion and populism in general.<br />
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If we do have tax reform, additional fiscal spending and the likes, that combination with years of loose monetary policy will, in essence, be helicopter money, aka wealth transfer. That, in turn, will mean more money spent in the economy and thus lead to inflation.<br />
<b><br /></b> <b>3) We have had a need to deleverage. As we deleverage, the increase in savings should correspond to an increase in investment. </b>The current deleveraging has led to insufficient investment. As the world moves from a glut of debt to a glut of savings, increasing investment will eventually follow suit.<br />
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<b>4) Populism gains prominence, one of the main characteristics of the times will be protectionism. </b>The two evidently goes hand in hand as we revisit Bridgewater's study on the subject matter. Needless to say, protectionism is ultimately inflationary - as the efficient allocation of resources and labor that existed during globalization will no longer be the case.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiP0fi-H4DWwI5JIrOGbMoyGmcpdqOiXDj41BaVV53YFy4MYl5fpZQ2ty9vcZl47jRDfoIvayRnFvPiXfKr3NE8jd0p1twYZeKyNRURkZ3KK6Dl9VS5zhXBpSc4sgWLuJoI_XNs/s1600/20170922+Characteristics+of+Populists.JPG" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><br /></a><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiP0fi-H4DWwI5JIrOGbMoyGmcpdqOiXDj41BaVV53YFy4MYl5fpZQ2ty9vcZl47jRDfoIvayRnFvPiXfKr3NE8jd0p1twYZeKyNRURkZ3KK6Dl9VS5zhXBpSc4sgWLuJoI_XNs/s1600/20170922+Characteristics+of+Populists.JPG" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><br /></a><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiP0fi-H4DWwI5JIrOGbMoyGmcpdqOiXDj41BaVV53YFy4MYl5fpZQ2ty9vcZl47jRDfoIvayRnFvPiXfKr3NE8jd0p1twYZeKyNRURkZ3KK6Dl9VS5zhXBpSc4sgWLuJoI_XNs/s1600/20170922+Characteristics+of+Populists.JPG" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><br /></a><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiP0fi-H4DWwI5JIrOGbMoyGmcpdqOiXDj41BaVV53YFy4MYl5fpZQ2ty9vcZl47jRDfoIvayRnFvPiXfKr3NE8jd0p1twYZeKyNRURkZ3KK6Dl9VS5zhXBpSc4sgWLuJoI_XNs/s1600/20170922+Characteristics+of+Populists.JPG" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><br /></a><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiP0fi-H4DWwI5JIrOGbMoyGmcpdqOiXDj41BaVV53YFy4MYl5fpZQ2ty9vcZl47jRDfoIvayRnFvPiXfKr3NE8jd0p1twYZeKyNRURkZ3KK6Dl9VS5zhXBpSc4sgWLuJoI_XNs/s1600/20170922+Characteristics+of+Populists.JPG" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><br /></a><br />
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<b>5) Low labor and productivity growth will lead to labor and supply shortages.</b> These shortages and deficits are inflationary. Companies will eventually have to pay more for the same amount/level of labor and same amount/quality of goods.<br />
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This has started to occur and other we haven't seen strong growth in wages, I feel like that is ultimately inevitable. [<a href="https://www.nytimes.com/2017/05/21/us/politics/utah-economy-jobs.html?mcubz=3"><span style="color: blue;">7</span></a>]<br />
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In conclusion, what I believe we have in store in the ultra-long term is the opposite of what we have witnessed in the 1980's.<br />
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To revisit, back then, after we top ticked inflation, we experienced a tremendous equity and fixed income bull market and a prolonged bear market in commodities.<br />
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I believe we are standing on the precipice of the opposite side. A huge bull market in commodities and a bear market in stocks and bonds in the works.<br />
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Some market thought leaders sniffed out this possibility last year. After a while, many other market participants ascribed to the view and jumped on the bandwagon post-election. However, the inflationary pressures and the subsequent rise in yield was short lived as many gave up as asset prices came back down.<br />
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Not necessarily applicable for the typical macro trader with a time horizon of 3 to 6 months. I do believe the key here is that it is indeed an ultra-long-term development and one that could affect the world for decades to come.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgJiIccFJbedZbOe64OCbgpEsz_NDAqVlpsEgT6dNvgDn5iEkgylCkKZzzCwmBG943y1VbEZ6JG2FYptz-3e8lcqTZo9OBif82IbZvhzSrauSTOkAyR8tUnuGAQQaOc3bSI5YXR/s1600/20170927+0%2525+Inflation+Headline.jpg" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="780" data-original-width="1116" height="223" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgJiIccFJbedZbOe64OCbgpEsz_NDAqVlpsEgT6dNvgDn5iEkgylCkKZzzCwmBG943y1VbEZ6JG2FYptz-3e8lcqTZo9OBif82IbZvhzSrauSTOkAyR8tUnuGAQQaOc3bSI5YXR/s320/20170927+0%2525+Inflation+Headline.jpg" width="320" /></a></div>
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Thoughts welcome.</div>
Macro Clownhttp://www.blogger.com/profile/17196568155114537578noreply@blogger.com35tag:blogger.com,1999:blog-34323687.post-34691331296479250162017-09-22T20:33:00.003+01:002018-04-14T02:01:34.685+01:00New Underlying Inflation Gauge From NY Fed Supportive of Dudley and "The Dots"<div>
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<span id="docs-internal-guid-2b9cb927-ab13-ecc1-1ff7-6f5fe554c1d6"></span><br />
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<span id="docs-internal-guid-2b9cb927-ab13-ecc1-1ff7-6f5fe554c1d6"><span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">Our friends over at Liberty Street Economics are hard at work generating data analysis for inflation nerds the world over. </span></span><span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">Their latest innovation is what they call UIG, or the </span><span style="font-family: "arial"; font-size: 11pt; font-weight: 700; vertical-align: baseline; white-space: pre-wrap;">Underlying Inflation Gauge</span><span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">. The NY Fed announced they would be </span><a href="http://libertystreeteconomics.newyorkfed.org/2017/05/measuring-trend-inflation-with-the-underlying-inflation-gauge.html" style="text-decoration-line: none;"><span style="color: #1155cc; font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">building this measure back in May</span></a><span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">, and yesterday they hit the tape with the </span><a href="https://www.newyorkfed.org/research/policy/underlying-inflation-gauge" style="text-decoration-line: none;"><span style="color: #1155cc; font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">current measure and data back into the 1990s</span></a><span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">. </span><br />
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">This is similar to the </span><a href="http://macro-man.blogspot.com/2017/08/dallas-fed-paper-pce-inflation-to-be.html" style="text-decoration-line: none;"><span style="color: #1155cc; font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">analysis of PCE revisions done by the Dallas Fed that I highlighted last month</span></a><span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">, and probably lends some insight into Dudley’s thought process, </span><a href="http://macro-man.blogspot.com/2017/08/the-william-dudley-speaksstill-waiting.html" style="text-decoration-line: none;"><span style="color: #1155cc; font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">which I highlighted around the same time</span></a><span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">. <b>The new UIG suggests that inflation may be rising faster than implied by the sagging core CPI figures of the past five months. </b></span><br />
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<span id="docs-internal-guid-2b9cb927-ab13-ecc1-1ff7-6f5fe554c1d6"></span><br />
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<span id="docs-internal-guid-2b9cb927-ab13-ecc1-1ff7-6f5fe554c1d6"><span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">To quote the article: </span></span></div>
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<span style="color: #42515a; font-family: "georgia"; font-size: 10.5pt; vertical-align: baseline; white-space: pre-wrap;">“Consumers, financial market participants, and policymakers are particularly interested in the trend, or persistent, component of inflation. But this variable is not observed, which has resulted in a variety of proposed proxy measures….Among its attractive features, the UIG is derived from a large data set that extends beyond price variables and displays greater forecast accuracy than various measures of core inflation.”</span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">Why does this matter? Is it just another number produced by a bunch of ivory tower eggheads? Again to quote (emphasis mine):</span></div>
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<span style="color: #42515a; font-family: "georgia"; font-size: 10.5pt; vertical-align: baseline; white-space: pre-wrap;"> </span></div>
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<span style="color: #42515a; font-family: "georgia"; font-size: 10.5pt; font-style: italic; vertical-align: baseline; white-space: pre-wrap;">“</span><span style="color: #42515a; font-family: "georgia"; font-size: 10.5pt; font-style: italic; font-weight: 700; vertical-align: baseline; white-space: pre-wrap;">...the underlying trend in inflation plays a critical role in the conduct of monetary policy. </span><span style="color: #42515a; font-family: "georgia"; font-size: 10.5pt; font-style: italic; vertical-align: baseline; white-space: pre-wrap;">Unfortunately, differentiating between persistent and transitory changes in inflation in a timely and reliable manner is a challenge. </span><span style="color: #42515a; font-family: "georgia"; font-size: 10.5pt; font-style: italic; font-weight: 700; vertical-align: baseline; white-space: pre-wrap;">Consequently, a large research effort has focused on extracting the trend component of inflation from monthly data releases.</span><span style="color: #42515a; font-family: "georgia"; font-size: 10.5pt; font-style: italic; vertical-align: baseline; white-space: pre-wrap;">”</span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">They even stick up for their own model: </span></div>
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<span style="color: #42515a; font-family: "georgia"; font-size: 10.5pt; vertical-align: baseline; white-space: pre-wrap;">3. What evidence suggests the model is useful?</span></div>
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<span style="color: #42515a; font-family: "georgia"; font-size: 10.5pt; vertical-align: baseline; white-space: pre-wrap;">Compared with core inflation measures, the UIG:</span></div>
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<span style="color: #42515a; font-family: "georgia"; font-size: 10.5pt; vertical-align: baseline; white-space: pre-wrap;">– can use information about subcomponent price changes</span></div>
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<span style="color: #42515a; font-family: "georgia"; font-size: 10.5pt; vertical-align: baseline; white-space: pre-wrap;">from the cross-sectional and time-series dimensions;</span></div>
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<span style="color: #42515a; font-family: "georgia"; font-size: 10.5pt; vertical-align: baseline; white-space: pre-wrap;">– can consider data beyond subcomponent price changes and</span></div>
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<span style="color: #42515a; font-family: "georgia"; font-size: 10.5pt; vertical-align: baseline; white-space: pre-wrap;">incorporate a large number of additional series;</span></div>
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<span style="color: #42515a; font-family: "georgia"; font-size: 10.5pt; font-weight: 700; vertical-align: baseline; white-space: pre-wrap;">– has outperformed core inflation measures in tests of forecast</span></div>
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<span style="color: #42515a; font-family: "georgia"; font-size: 10.5pt; font-weight: 700; vertical-align: baseline; white-space: pre-wrap;">accuracy over different time horizons;</span></div>
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<span style="color: #42515a; font-family: "georgia"; font-size: 10.5pt; font-weight: 700; vertical-align: baseline; white-space: pre-wrap;">– provides a more timely and accurate signal of turning points</span></div>
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<span style="color: #42515a; font-family: "georgia"; font-size: 10.5pt; font-weight: 700; vertical-align: baseline; white-space: pre-wrap;">in inflation.</span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">Put another way, there are some important bosses at the Fed that don’t think core CPI is doing a good job to discern underlying inflation trends, and they want something better. This is what their intrepid staff came up with. The two time series are “prices-only” and “full data-set”. “Prices-only” is just what it sounds, a statistical interpretation of the CPI data, while the “full data-set” incorporates many of the factors implicit in a financial conditions index, like labor market conditions, ISM variables, money supply/credit growth and financial indices (rates, equities, etc.). </span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">Here’s what yesterday’s print said: </span></div>
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<span style="font-size: 10.5pt; vertical-align: baseline; white-space: pre-wrap;">The August CPI showed a further pick up in inflation from June. In response to the firming of CPI inflation, both UIG measures </span><span style="font-size: 10.5pt; font-weight: 700; vertical-align: baseline; white-space: pre-wrap;">displayed a rise in trend inflation.</span></div>
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<span style="color: #42515a; font-family: "georgia"; font-size: 10.5pt; font-style: italic; vertical-align: baseline; white-space: pre-wrap;">-The UIG measures currently estimate trend CPI inflation to be in the 2.2% to 2.7% range, with both registering above the actual twelve-month change in the CPI.</span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">Not only did trend inflation rise in August, it has been rising much of the year, </span><span style="font-family: "arial"; font-size: 11pt; font-weight: 700; vertical-align: baseline; white-space: pre-wrap;">incredibly moving the opposite direction of headline AND core CPI. </span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;"><img height="405" src="https://lh6.googleusercontent.com/Ej73UrGIqKC7okqk4M5aHEwQn5i_esCH4gZdUCTsqP5p3tbscjnG3fYzJfNd5q4f7qeoF6fBd86ByauDvcogjz7IM2uyWvqr_FMXFp46PEfxlJnzKOQemtKZKPQwpcMOf0Ckbkzg" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="511" /></span></div>
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<span style="font-family: "arial"; font-size: 8pt; font-style: italic; vertical-align: baseline; white-space: pre-wrap;">Source: New York Federal Reserve Data</span></div>
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<span style="font-family: "arial"; font-size: 11pt; font-weight: 700; vertical-align: baseline; white-space: pre-wrap;">If you’re looking for a reason why Yellen and Dudley see inflation on the horizon, or a reason why they are remaining hawkish despite weaker than expected inflation figures, this is it. </span><span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">Given this data, it is actually rather surprising the term structure of “the dots” flattened as it did….but it also makes you ask: where are Yellen and Dudley’s dots? This argues they are closer to the top of the scatter than the middle. And those two dots are the only ones that matter. </span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;"><img height="298" src="https://lh4.googleusercontent.com/pUe63npikeJ13JhDt5qFf-Jy7g37igHKDka7wL_3JrtrPvUo_SDBxTsw1CV8Tpi5unkUlfSiHH9mH7osN7OZMkDQ2onNLrdotUqc0YfiH9puwofrKr9RnFHu52CW2iC-KqXvwbQ2" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="521" /></span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">The gap from the red dots (the market) to the higher end of the median dots is roughly 50bps in 2018 and >100bps in in 2019. Clearly the market hasn’t taken in a more inflationary economy--only the more hawkish Fed. You can’t separate one from the other. </span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">Here’s the probability distribution for the December meeting--the consensus has shifted to a hike: </span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;"><img height="293" src="https://lh3.googleusercontent.com/dm26mMvW0gBiferUn7ZamDCGcHDbbkU-bsO9wXeltooypvhB4pcWnhlfbd-o8KVmASfAcpuohXMSSqqM9VhmDh2A2AUGan0nnPtliC671cRgNQSLgxAqBs93UzTTdwKfFe7asTBJ" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="502" /></span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">But take a look at the distribution for the March meeting--the probability of two hikes by that time is no higher than it was back in July. </span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;"><img height="300" src="https://lh6.googleusercontent.com/q0RAcE6cdc1zm7Myk3zYpwK3hm4wvtEZNjPMasQa74VboCrJZZvIQhFzH_cEhhjKCgf58F54oSqJhrNwZZ9v5_yhInx3S6FlnQLkeo-5krGijxi7v7pFfTNYSUbkbmgOjWxMXxT2" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="513" /></span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">Maybe it is a slow Friday afternoon but the bearish flow in the front end isn’t going away. The front end led the curve higher post FOMC, and even when shorts took some profits this morning, by the end of the day the curve had resumed bear flattening. </span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">This chart shows a proxy for the EDH8/EDU8 spread (orange, 6m3m vs 1y3m) and the EDH8/EDU9 spread (6m3m vs. 2y3m). This serves as a proxy for what is priced </span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;"><img height="287" src="https://lh3.googleusercontent.com/G213Qs13VgmBNbFRO_E3cdjQ_Ohu_N-t7UUCH_54p9Ge85dyy7w7NJ8YO1Yk1QBEDmHST7avlK3MjQNZEoIqpyHrCpoH7xpIEgJPtYrh9XVjhBKVnj3Nrjt6i24W9RVi3FOtmhAc" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">I see those two eurodollar spreads continuing to steepen towards their high back in early July, which would be a move from roughly 13bps to 23bps in EDH8/EDU9, 32bps to 55bps in EDH8/EDZ8. </span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">And yes indeed, that would cause a reversal in the USD we’ve been discussing this week, a conversation that </span><a href="http://macro-man.blogspot.com/2017/09/dollar-and-rates-bounce-imminent.html" style="text-decoration-line: none;"><span style="color: #1155cc; font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">DR got rolling</span></a><span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;"> before the market woke up to the FOMC rhetoric on Wednesday....I’m slowly starting to move towards DR’s camp. Yet there is reason to be cautious vs. G10: </span><a href="https://www.wsj.com/articles/fed-paves-the-way-for-the-ecb-to-follow-1506004565" style="text-decoration-line: none;"><span style="color: #1155cc; font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">The WSJ had a good article this morning</span></a><span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;"> mentioning that a more hawkish stance from the Fed would give the ECB a green light to start tapering and the BoE to liftoff--so perhaps EUR and GBP aren’t the best choice there--CAD might be in the same camp, where the newly hawkish Poloz is taking no prisoners. </span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">I’ll stick with my long standing bearish view of JPY </span><a href="http://macro-man.blogspot.com/2017/07/asia-fx-waking-up-from-summer-doldrums.html" style="text-decoration-line: none;"><span style="color: #4a86e8; font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">and KRW</span></a><span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">, both of which don’t seem ready to rock the boat--I think EMFX </span><span style="font-family: "arial"; font-size: 11pt; font-style: italic; vertical-align: baseline; white-space: pre-wrap;">could</span><span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;"> continue to do well if Chinese demand holds up--and I wouldn’t expect the Fed to hike strongly enough to stop global growth momentum--but I do think there’s a reasonable case for a return to rates, curve spreads and fx levels from earlier this year.</span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">Despite the potential for a coordinated tightening of monetary policy, we should expect some convergence in </span><a href="http://macro-man.blogspot.com/2017/09/usd-followup-and-fed-preview.html" style="text-decoration-line: none;"><span style="color: #1155cc; font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">front end interest rate spreads relative to the move in the dollar</span></a><span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">.</span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;"><img height="273" src="https://lh5.googleusercontent.com/KPM4E3enfBH-vFaDUHUAvMyPtPHF3XS1xi7-EtZSockmRl-0Yg4b2ZoV_cc87GVET0byofHn4qkx7L1xh4uq_zpv86NE1QMi6eGmwtdOdpJmFZAgWrCrCPoXnm6pyHtgcIq9Kwj1" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="459" /></span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">That’s it from fly-over country….good hunting! </span><br />
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Shawn<br />
<a href="mailto:TeamMacroMan@gmail.com">TeamMacroMan2@gmail.com</a><br />
<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;"></span><br />
<a href="https://twitter.com/EMinflationista" target="_blank">@EMInflationista</a><br />
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EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com18tag:blogger.com,1999:blog-34323687.post-20573281696782901012017-09-20T19:51:00.000+01:002018-04-14T02:01:00.664+01:00Argentina: Think Globally, Act Locally<b id="docs-internal-guid-adeca98d-a06c-288c-3c2b-7cce32891a3f" style="font-weight: normal;"><br /></b>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Fed as expected...sorta? Is this USD rally and selloff in the front end because the FOMC didn't mark down 2018 dots and Yellen says gradual rate hikes will continue? They did have to keep that December dot implying a hike--if they took it out it would be a major mistake to try to put the toothpaste back in the tube and hike after all--but if the data rolls over it will be no surprise if they simply decide to stand pat. Maybe more indicative of market complacency and long technical positioning than anything else...</span><span style="font-family: "arial"; font-size: 14.6667px; white-space: pre-wrap;">I dunno....go ahead and whack bids on the levered VIX vehicle of your choice. I genuinely don't believe the December dot is a fundamental change, or hawkish signal. </span><br />
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span>
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Deep dive time again folks...there was a quick mention on usd/ars in the comments last week--circling back to this market, the Argentine peso has been left out of the EMFX fiesta the past few months. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="213" src="https://lh6.googleusercontent.com/P02WafPKyfg1zmoIZEkVUA_HASkV_6kuiFNDXUwbnrAHvVlfVPw_dOazbFkORYicdzY-c3eQLVvZsM41mtvu2LtUiZLxifo7lwkRkVu3ir_IjTWp7NVQCzkQ2gNFQpXTFHkhypRN" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="464" /></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">ARS has been a notable laggard over the last three months, and finishes dead last YTD, </span><a href="https://www.wsj.com/graphics/track-the-markets/?mod=topnav_2_3022" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">according to data from WSJ</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">. Yet carry is over 20% per annum--a veritable tractor beam for sucking in EM and crossover investors.</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">While there has been continued optimism in the local political scene and inflows have continued, there is a divergence between tighter USD bond spreads and the value of the peso. Let’s break this down into its component risks. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">The Credit</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Frequent readers will remember </span><a href="http://macro-man.blogspot.com/2017/06/economist-riff-of-week-argentina-100.html" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">my post</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> on the government’s issuance of a 100-year bond back in June, an event many in the media, and even some old hands like Howard Marks, viewed as the end of times. The point I wanted to make is that it was driven by reverse inquiry--real money wanted a more capital efficient vehicle to express a positive view of Macri and his reforms, and the duration was better defined as a leveraged bet on medium-term credit improvement rather than a bet that the country wouldn’t default on my grandchildren. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">If all goes well until year end, a couple of PMs that made that reverse inquiry are going to clear a pretty nice check...After tapping the market around 90, the century bond is going looking to take a crack at par...and that’s not even counting over 7% carry, payable in USD and settled in New York. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">After winning an important election in June, Macri’s ratings are still relatively good by the standards of Latin America--with approval ratings ranging from the 40s to low 50s, and polling for the upcoming senate race shows Macri’s candidate with a small lead over former president Cristina Kirchner. A victory in this election would be a big signal that Macri’s platform will be sustainable politically and improve the odds for him to win a second term.</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="271" src="https://lh5.googleusercontent.com/s-eiQvcWDe3bXtmy7Kp889-8Hx5_1RkhTl3l4KHhJ4XsOhIG0AqQ8CUjIMf5z1N7uR7jSAHdVcpZrTg0qjwi1yEQ650RY2bRmDndht_Gbyc_nAAma2OyYOWwEO3TA70X2-L05_-B" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="275" /></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">I continue to believe global trends will buy time for Macri’s agenda to work--and while an Argentine election is always a bit of a crapshoot, the trend in Latam favors center-right candidates as the pendulum has swung away from the neo-socialist candidates that won victories in the early 2000s in Argentina, Brazil, Peru, Ecuador, Venezuela and Chile. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Beyond the political risk, the fiscal situation is far from healthy--and will require a bout of austerity and likely significant spending cuts. The 2017 primary balance is a nasty -4%/GDP, which means the government is going to be running up a larger debt load for the foreseeable future. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="223" src="https://lh5.googleusercontent.com/Iyl0IsGzbHKf9UNQKYnVb8VJrRg7pJJes6BpfJRvh8Ho_NUOSOtuNjZBju7-1Cju2_2NDVNVslGAx2wNt3eXININgG1Zt2FgFmKSw23wSuSR90nBbNwBYP_01vO5wD8lL7HzXrPy" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="265" /></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">With the economy still sluggish, here’s another chart that keeps the reformists awake at night: </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="295" src="https://lh6.googleusercontent.com/O-5xYzCCd_oyXz81AKpYUSahLA7T0gRstusf5EORoIk0tIFokbqxlhFUs6BL3SzDLE9SxExhS5bfr7Y_pqr4BgZ6ZnzjHyPGJHNwRrMCDEzi0SpSXeDMY4kRKVP83BQY7t-WRhH_" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="566" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Put another way, just as in Brazil, nearly 40% of the budget is going to pensions and social security obligations. That is simply strangling government finances. Slashing these benefits to cut the budget deficit isn’t going to be easy on the economy, on voters, or on the government’s relationship with unions. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Will Macri have the political capital to push through a pension reform? I’m skeptical--higher taxes seem more likely, but that can’t fully close the gap. A “fiscal rule” law would be a politically palatable intermediate step. Either way, as the charts below show, an acceleration of public debt at this pace for a sub-investment grade credit is simply unsustainable. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="278" src="https://lh4.googleusercontent.com/K9Yqqk_a36AUlj-Yfd0u4ccx_Y_OaIy9Dhjflus0b2F506SuQelLKX3vUHs9o6uq3t6cCEymdNSGXxMDf9tGBrIcxvo062V7CzVo9N9VvBKoU043860cPmXW__ao62s_bNaoh_Qn" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="329" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Which brings us to how Argentina fits into the broader EM sovereign credit universe. Below I have highlighted the public debt burden in Argentina, and circled a couple of similar credits--Brazil and South Africa. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="318" src="https://lh6.googleusercontent.com/mY6HCTtg7WVkDQcIuj4vQUW7_BpI_qEAsB0fSln4eHHM1B9j54eYedOrQCLRMPGyZeEOIw9cU9qX6aP4ZNUQUdkj32-C2UT5uUoxlWuLofdwHeg-T5ECyTNaERbyKvziv9Efw7MT" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="565" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">From a debt sustainability perspective, Brazil and South Africa have similar burdens--Brazil is certainly trending fast in the wrong direction--but has a much bigger stock of domestic savings and (maybe) a reform movement of its own. South Africa has a worse political situation but a stronger domestic economy and not near the primary budget gap of its Latin brethren. Pairing that with a look at 5y CDS levels (as a proxy for credit spreads at large) demonstrates just what kind of premium investors are being paid in Argentina: </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="263" src="https://lh6.googleusercontent.com/Q8IeofF_-OFfn3rkrPt_S-SA10NQX8KkBdk1bQBPURsKB8UDDBFFGBQXl90rc7DkMQAq-JWtZTb7p8WYNQUuNUc98NRBU6v1-RDjiu3wNqy9QzARJhCKUqI8qR4mc7Z6F7mlcHkQ" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="549" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Yeah, juicy….so you can see why that kind of premium compared with a center-right, technocratic, reformist government is an attractive combination for foreign investors, especially when those investors have been starved Argy exposure (and yield) for years as they were locked out of international markets. </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">My takeaway on the credit is that there is much more beta than alpha at these levels--I continue to believe in the positive local theme, and it will work so long as the “reach for yield” theme works globally. I expect Cambiemos will win in October, which should provide a short-term tailwind, but the medium-term is fraught and highly dependent on local and international factors that could throw the reform movement into a state of chaos. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">The Currency </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">As the century bond ripped 10 points in less than three months, an investor that sold a 3mo usd/ars NDF at the same time has essentially made nothing. Spot ARS has cheapened, but with that spicy 20% carry (in ARS), you’re basically flat here. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="268" src="https://lh3.googleusercontent.com/14uFQQ_4-mh4xdU48S841WcOl6RG5Xz2I2lS-x41iGUvo1KpJTeyl-6DYwqNlmDw4DQ2z-rQzi7UkTgAnbT7GCTOQ4gpj9UusNrYuvbkT4ZXMJhjeaL1PBug_1tnyVtH54qiWjTH" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="583" /></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">So what gives? USD has weakened across the board….”risk-on, reach for yield, buy EM” is arguably the theme of the year...Macri’s coalition performed well in primary elections and remains relatively popular….What’s not to like about ARS? </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">There are some fundamental and technical headwinds that have prevented further ARS appreciation. The first is a combination of the political economy of the Macri administration and the continued triage of the damage wrought by years of the Kirschners populist policies. </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The first is local real rates. ARS rates are 20-22% are for a 1-3mo non-deliverable forward (NDF). The idea here is that if you want to buy pesos via an offshore derivative, you receive an ARS asset vs. a USD liability, to be settled in New York at an agreed, published fixing rate linked to the spot rate at the maturity of the derivative contract. </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">While rates are fantastically high by global standards, much of that value is eroded by inflation around 22% YoY. As I have mentioned before, at that level of real rates in Argentina you are highly levered to a positive economic and political outcome rather than a simple “cash and carry” trade. You’re gonna need help…. from inflation, from the BCRA, from Macri, and from voters. Will BCRA make progress in the battle against inflation? Will voters be patient enough with reforms to continue to support the government? </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="216" src="https://lh4.googleusercontent.com/AphzE8EQHGZEgmNiZ8VqKalK12jJSox_J7hhEI7CqzZJC67Nq4yQZ_KMre0JepHKgwS67mAo1gSW1uolfUYuLswmX-E7CvAq0jUFjRg_VhzIIL-Afe2aP4zZwjzo5eSyoLWo4-Hc" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="502" /></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="279" src="https://lh5.googleusercontent.com/aKq3hEqhLXn3wKLRkIdAA7dBSs-EftYxv58uD9OSTqij7K8m4xpxaVO4pAisCrR083Rg-_QCrZOorEJDJxXkeeRe7lnc_xm5HnDQpsmEeuSR1Qa1wkL2XvM5b1iQyh217xJXdzBm" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="508" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Another headwind for the peso is the central bank’s desire to accumulate foreign reserves after years of drawdowns. Earlier this year the BCRA announced they would continue to increase international reserves. The central bank is targeting a reserves-to-GDP ratio around 15% over the next two years, which according to a report from the Brazilian bank Itau, would require an increase of 48.3bn USD. </span></div>
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<span style="background-color: transparent; color: dimgrey; font-family: "arial"; font-size: 10.5pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="269" src="https://lh4.googleusercontent.com/Vx8Mxiy_Q9K5XNK8OBvK9HmVhtVeR-wFyAdwp4OUuDmWhw7nz7caqhfqP79WwQ0O-i4JcqfBmCTWGdbIzhsqAaaqrRhb1fULbcsBOAsxtIvgz0Fo9NKDkUu403TDZqhCERVOgn_m" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="298" /></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The central and provincial governments will issue more bonds in USD during that time, which the central bank will exchange for pesos. But there will be a significant gap between USD issuance and the accumulation to bring reserves to adequate levels. </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">That means the central bank will be on the bid in USD when there is significant appreciation not tied to improvements in the political situation and/or sovereign risk. Getting back to the opening point, that also fits with the administration’s incentive to keep ARS competitive and allow export markets to heal and grow after years of capital famine. Similar to the credit, this is an attractive carry trade if you buy into “the story”, but not without its risks. I think ARS will appreciate over time, but it won’t be quick. </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">A trade I like more than the credit/politics driven trades in outright usd/ars or the USD bonds is the local t-bill market, known as Lebacs, which sport a yield of roughly 27% for maturities under one year. The catch here is that you have to bring USD into the country, sell it in the spot market, and buy the Lebacs.Then you hedge that ARS exposure by buying a usd/ars ndf to the same maturity in the offshore market around 22%. You pocket 5% per annum for running the local credit risk and risk that the government again implements currency controls.</span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Why does this spread exist? I think it is a combination of three factors: 1) the bid for spot USD by the BCRA, 2) bullish fast money traders hitting bids in front end NDFs (Johno, I’m looking at you), and 3) higher local yields driven by supply of lebacs the BCRA issues to sterilize the ARS they are selling into the spot market when they buy dollars. Quite simply there is a shortage of dollars in the local market and there aren’t enough investors brave enough to step into the breach. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> </span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Any EM trader with stripes on their back, or one with even a cursory knowledge of Argentine financial history will tell you the catch there--one day the government may decide to implement capital controls because they don’t want to give your dollars back. You’re stuck with Argentine pesos with no way to exchange them back into dollars. Ask any US airline with </span><a href="http://money.cnn.com/2017/07/27/investing/delta-venezuela/index.html" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">connections to Caracas </span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">how that worked out for them. </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">But compared to 5yr CDS under 300bps, this is a very attractive spread. An investor sells USD into the local market and receives about 500bps with no FX or duration risk. The lebacs and ndf hedges mature every one to three months, so you have the opportunity to get out if the fundamentals or political situation deteriorate. That is unlikely--Macri’s structural reform agenda may or may not materialize, but he has embarked upon capital market reforms that aren’t going to be unwound before the presidential election in 2019. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Long story short, at 500bps this spread is well in excess of the risk that the government will again implement capital controls over the next 3, 6, or 12 months. It’s a clean single to right field if you have the cash and local legal set up to do it. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Not sure if the MM audience is well versed in the dynamics of on-off spreads, but feel free to step up and throw in your two cents on the credit or the local scene. </span><br />
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span>
Shawn<br />
<a href="mailto:TeamMacroMan@gmail.com">TeamMacroMan2@gmail.com</a><br />
<span style="color: black; font-family: "arial"; font-size: 11pt; font-variant-east-asian: normal; font-variant-numeric: normal; vertical-align: baseline; white-space: pre-wrap;"></span><br />
<a href="https://twitter.com/EMinflationista" target="_blank">@EMInflationista</a><br />
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EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com22tag:blogger.com,1999:blog-34323687.post-63699170046233222312017-09-19T03:00:00.000+01:002018-04-14T02:00:41.503+01:00USD Followup and Fed Preview<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">A couple of charts and some thoughts to follow up on Detroit Red’s post about the potential for a </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">bounce in USD. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><b>There has been a clear break in what is historically a strong correlation between the 1y3y US/EU interest rate spread</b></span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">--DR highlighted this in looking at breakevens and copper--I think this chart refines that point and shows there is very little change in medium-term inflation expectations in either market, as proxied by the spread of short-term rate expectations 3 years from now. Yet EUR (and pretty much every other currency) has been ripping vs. USD since this correlation broke down over the past couple of months. So something else is going on here. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="305" src="https://lh4.googleusercontent.com/qBbr8s1ab8gP2Rj0ItNY58qOHtw9eQErEA47vlIgIzYF9BGAXcVorc8WNYT0sUQYFEY6mOGQXp500HhnI4X7-Aiz-oNNVU5W_Uapi5-daPuw9wXST2WNlr8N6jnV7r_wr1NLgGsP" style="border: none; transform: rotate(0rad);" width="640" /></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="262" src="https://lh6.googleusercontent.com/fQRvFo9LLG5pE-ucX9RoL7rJXYoF2Nu247k2o-ayfZXLp3DoH09KXgiVqgG7pDq-AhEVAIE1WYvxDE9LyXGyJjkIikQfUm2BHJVDQAVt8Z1dLG_zSlgZWGMgnGzzwYETbpFvCh5p" style="border: none; transform: rotate(0rad);" width="640" /></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><b>DR circled the right factor by looking at copper.</b></span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> This breakdown coincided with the time when cooper went from having a nice run to giving (old) traders flashbacks to 2005. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="246" src="https://lh3.googleusercontent.com/2Ez6ohCwYRKvI4hRjoFnZs3_bt0wk01eKnJiBL9EJQiGTAK6sU9-rHwwvC33IP__MXrCx90GMOhT8G8hhtTdEtLu1_LNPR5JpabUn06HUPC1qBp78zMoIJTQJLIj48XJ6BijsmOI" style="border: none; transform: rotate(0rad);" width="400" /></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Yet this is the second derivative--</span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><b>copper is cruising because of resurgent global demand--which is code for “China.”</b></span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> the PBOC has had more success stifling capital flight this year, which has contributed to the USD move--but </span><a href="http://macro-man.blogspot.com/2017/09/cad-to-china-to-copper-to-frojo.html" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">as I highlighted here in a post last week</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">, that misses the broader point that the growth trends in China are looking very, very good. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><b>Stronger Chinese demand is the jet fuel for the German export machine--so while that strength may not manifest itself in interest rate differentials it certainly does in capital flows and long-term expectations for return on capital</b></span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">, both of which were at historical extremes for EUR in 2016 after the ECB finally pulled the trigger on QE. Yet since then the euro area current account surplus has only continued to rise. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Similarly, </span><a href="http://macro-man.blogspot.com/2017/06/whats-going-on-in-eur.html" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">as I noted back in June</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> when this move was getting going, technical positioning in the EUR was also coming off of perma-short levels. This doesn't necessarily show up in CTFC spec charts--much of the outflows were domestic corporates and real money fleeing negative rates and leaving foreign purchases of bonds and equity unhedged. As the economy rebounds, that money is repatriated or hedged back into EUR. </span><br />
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span>
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">To the extent there is any tradable info at all in CFTC spec positioning charts, I dug up this on current USD positioning--a dramatic shift towards short USD over the past month--but note how long, in size and duration--the spec community was in USD pretty much non-stop since 2014, with only one real reversal last year ahead of the US election. </span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><b>Bottom line: the market is short USD...but not in any meaningful way, especially compared to the tailwind of economic growth and trade flows in Europe. </b></span><br />
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><i>(the blue line is the spec position...the black line is a dubious measure at best)</i></span><br />
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span id="docs-internal-guid-bb5a8f3f-9781-7db4-9462-5da43cf7ace4"><span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline;"><img height="400" src="https://lh5.googleusercontent.com/YSRygdOdP7KLozNfeoGlKlmiLxEqJ8yAIA-EKsufL09rH9z3aMQV83M5SySn79qv-qJepgTYy1eXNnzpDjxcErgUnbqeR72p4d93FDbKGEt43cC2SnTcNhydh8akjejg0yoKlxLR" style="border: none; transform: rotate(0rad);" width="382" /></span></span></span><br />
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">And forward rates at large popped last week but still not getting away from themselves, which argues the market hasn’t quite bought into the economic momentum story yet. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="305" src="https://lh5.googleusercontent.com/zErnxaTagNkN7gMrpQP94JiCRrcpO0dzMfDYubkd-7vk4Bog3oxbxWs_lXZcLB3_PqO9cTQIiA4wiGyWOf-OoQ2EdGVqn4FVEyxtwil649R_-rOfk1qZWISPmDeAdJCbAlL2QYMO" style="border: none; transform: rotate(0rad);" width="640" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Looking at economic expectations and interest rate differentials there is good reason to believe there could be a reversal in USD, but the big driver is China and the related moves out of the US and into, well, pretty much anywhere. Is the short USD trade overcooked? Maybe, but... </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">As much as both DR and I want to avoid the forecasting and prediction game….</span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><b>there will need to be a catalyst for a significant reversal</b></span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">, unless we are just catching knives for a move back to 1.17, which would be what the mean-reversion/regression scatter would seek to target. That leaves a structural long USD position on the wrong end of a few pain trades--an air pocket in Chinese growth, lower commodity prices/demand, a train wreck in corporate debt and/or EM, or….higher US inflation, a selloff in US rates, a steepening of 2/10s, or a more hawkish FOMC. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Frequent readers of the blog will know I’m not betting heavily on any of those--I agree that there is some evidence that the market is too complacent to an acceleration in wages or demand-pull inflation, but until I see evidence to suggest otherwise, I’ll stick with what this guy is says: </span></div>
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<iframe allowfullscreen="" class="YOUTUBE-iframe-video" data-thumbnail-src="https://i.ytimg.com/vi/D8_nRkCJx9o/0.jpg" frameborder="0" height="266" src="https://www.youtube.com/embed/D8_nRkCJx9o?feature=player_embedded" width="320"></iframe></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Turning to the Fed…the higher than expected CPI print last week did indeed wake up a few traders to the notion that there is indeed a Fed meeting next week, and the quarterly one where we get an update of the Summary of Economic Projections. Let's take a look at what might change. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Here is a summary of the median responses from the governors were in the June SEP. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="319" src="https://lh5.googleusercontent.com/A2Uast7OOm3dc-tkNCkvVP9Eh83WPoZBE5uUWp9q_JSVS7hXtfqQ5THpcckigYRaJhcYxMsYIdCp0idI7PETDNRRWPUtOVT9Xf_tY1qYRGVQLOi8BEgMX47gi0HAS2YEPHWPWJ0w" style="border: none; transform: rotate(0rad);" width="320" /></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">I don’t think there is a great argument that we will see much change in any of those variables--</span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><b>while GDP for 2017 could be marked lower, it will be reversed out with higher estimates for 2018 due to one-offs from Hurricanes Harvey and Irma.</b></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">PCE inflation has been the story of the year, as the Fed has wrestled with “the conundrum” of lower inflation and higher employment. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="157" src="https://lh3.googleusercontent.com/AOTXxwgBXJk7RA_31oKukSTy8DtNiz2jLbB6zl0-Bo7gcX9i2cbr2G35LgflDdiLeEhrxQcthlHri7uTAuz1OVI8P9Za_EudVtkinM1-gkxArDdfi69DXQQSakgY_q1qZTlJ0EH-" style="border: none; transform: rotate(0rad);" width="400" /></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">While you see that the governors already marked down inflation expectations last quarter, only last week was there any reason to believe there wouldn’t be more to come.</span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><b> Yellen has made some rumblings about one-off impacts on inflation from medical prescription and cell service prices, but those can’t be big enough factors to change the trend. </b></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><b>The trend of lower inflation since the June SEP could force the governors to again mark down expectations for PCE inflation...</b></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="244" src="https://lh4.googleusercontent.com/vuPFM-zc9I8hBkqFnSSA8-i6kika5lvYk23Ou7w73IWWKQtQhBpDaXuRNP-DosYBjSyUuKMc48Bc3LWxp19lPDnJy4AOUaMGkt0xGtGMyz0OTiX1BpwrCbf3RZqmLI4fEJx0fNgm" style="border: none; transform: rotate(0rad);" width="640" /></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">in the famous dot plot... </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="441" src="https://lh5.googleusercontent.com/nw7VWRJQXcDaYifBak6zcs4C6vdeDqtchQwxcAfWTCvGD_BzGcKFxisFebkuXv5eV6gkvYQhKTfY9be5CS0Wn1kouUzUpBhu207AvCJyIkjyYc_VF529wCOkQ1gCQBM7HjnXcYW9" style="border: none; transform: rotate(0rad);" width="485" /></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The risk would be to lower forward rate hike expectations and a flatter curve rather than backing off of the pledge to continue monetary normalization in the short-term. </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Having lost the great Stan Fischer, Janet and Dudley are now the dynamic duo, and both have continued their hawkish rhetoric...so they can raise rates, if only! If only wages start to rise and takes inflation with them. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><b>The statement, press conference, and SEP will seek to preserve their optionality while again trying to maintain some credibility in recognition of flatter curves and low inflation.</b></span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><b>Going full circle back to USD and rates, that result isn’t going to give much of a push to the dollar--in fact it is more likely to keep the curve flat and allow the equity market to keep on keepin’ on. </b></span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">There just isn’t much evidence to suggest the FOMC will upset the apple cart quite yet. </span><br />
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Shawn<br />
<a href="mailto:TeamMacroMan@gmail.com">TeamMacroMan2@gmail.com</a><br />
<a href="https://twitter.com/EMinflationista" target="_blank">@EMInflationista</a></div>
<br />EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com14tag:blogger.com,1999:blog-34323687.post-5430382805113972242017-09-18T05:51:00.002+01:002017-09-18T06:04:42.595+01:00Dollar and Rates Bounce Imminent?The dollar's slaughter has been well telegraphed, as US rates have marched lower due to a combination of persistently low inflation and as some market participants deem potential recessionary conditions imminent<span style="font-size: inherit;">.</span><br />
<span style="font-size: inherit;"><br /></span> <span style="font-size: inherit;">What if I was to tell you that the opposite could be imminent? Would you be interested in reading further?</span><br />
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In the past, we have also <span style="color: blue;"><a href="http://macro-man.blogspot.com/2017/08/cuckoo-for-cocoa-futurescommodity-catch.html"><b><span style="color: blue;">documented on Macro Man in a commodity catch-up</span></b></a> </span>post that the markedly strong move in copper and other base metals in the past has usually hinted at strong economic growth and inflation.<br />
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These two factors being at odds for what seems like an eternity (in trading terms) leads to my belief that we will eventually hit a make or break moment will the divergence between these two correlated asset classes will mean revert.<br />
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Let's get into it.<br />
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So I am claiming that we probably have a significant bounce in the dollar in the making...<br />
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A few drivers that can potentially make this bounce happen:<br />
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<b>1) The big one to me is the break of correlation between inflation/inflationary products. Using copper as a proxy, we can see that the returns of the two products show a clear correlation - obviously, this makes sense vis-à-vis economic intuition; the R-squared is a bit low as copper is naturally more volatile compared to breakevens.</b><br />
<b><br /></b> <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh7GwSaC0WHWuqnqKmuAf2d_XTyFy2W77Np1-h8idnVDlr0Wa1veivHHCzWfqP470wGb6fZoWm-AsnZ6aq5CpxcZtUVajy46Za9nksYEoWZDhvrVQDa272QE8euLuY0kqJfg4nH/s1600/20170911+Copper+Breakout.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em; text-align: center;"><img border="0" data-original-height="589" data-original-width="1600" height="234" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh7GwSaC0WHWuqnqKmuAf2d_XTyFy2W77Np1-h8idnVDlr0Wa1veivHHCzWfqP470wGb6fZoWm-AsnZ6aq5CpxcZtUVajy46Za9nksYEoWZDhvrVQDa272QE8euLuY0kqJfg4nH/s640/20170911+Copper+Breakout.JPG" width="640" /></a><br />
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgokSMVITHct3WBvxI5Ast5WTLAe8_1gGp-C-Oe_cfgeBxYoYbHSPhuzbOE22UXWOX34ff7NHfT7ywoWyf0DvE3FTEMNB-6fOxY12PPWYNGil5uo1z-Lo_kFqYO8CP1RAXiEF7d/s1600/20170911+Breakeven+Breakout.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em; text-align: center;"><img border="0" data-original-height="544" data-original-width="1452" height="236" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgokSMVITHct3WBvxI5Ast5WTLAe8_1gGp-C-Oe_cfgeBxYoYbHSPhuzbOE22UXWOX34ff7NHfT7ywoWyf0DvE3FTEMNB-6fOxY12PPWYNGil5uo1z-Lo_kFqYO8CP1RAXiEF7d/s640/20170911+Breakeven+Breakout.JPG" width="640" /></a><br />
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We have seen a huge run-up in copper but breakevens have sputtered. I see this correlation maintaining and the gap between the two closing. If we have a rise in breakeven inflation going into year-end, then that means there would be a corresponding move in rates, and thus a notable bounce in the dollar as well.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh6lRt5IdVW1Wtp3Xu5u8NEGA0l508Ygx821Hm28IXqliMUR3Ht7p_ktVUnX4GlIYmc-EOEe3YWxrH6PJb9ZHO_Mb3MuOZJamTy04gxq9VGnW_Smt_-KEW4Zc78SAqOgGqj7O4I/s1600/20170915+Breakeven+vs+Copper+Returns+Correlation.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="658" data-original-width="1019" height="412" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh6lRt5IdVW1Wtp3Xu5u8NEGA0l508Ygx821Hm28IXqliMUR3Ht7p_ktVUnX4GlIYmc-EOEe3YWxrH6PJb9ZHO_Mb3MuOZJamTy04gxq9VGnW_Smt_-KEW4Zc78SAqOgGqj7O4I/s640/20170915+Breakeven+vs+Copper+Returns+Correlation.JPG" width="640" /></a></div>
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<b>2) That transitions us to point number two - rates. I'm specifically looking at fed funds futures where we are pricing in a tad more than a 25bps hike by January of 2019. Whatever outcome materializes in the US economy, it seems to me that the fed funds curve is too flat and investors are being too <i>cautious</i>.</b><br />
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Like I said, whatever the outcome may be, PnL is path dependent - you will undoubtedly have rhetoric, communication, and expectations to shift (at the very least during pockets of time from now till 2019) where we see both a drop in fed fund futures across the curve as well as a steepening of the fed funds curve.<br />
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That occurrence should coincide with a dollar bounce.<br />
<b><br /></b> <b>3) Okay, we've talked about inflation and rates from a correlation perspective. What about the fundamentals? </b><b>Inflation has been stubbornly low, but there are signs of an uptick bubbling below the surface.</b><br />
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Wage growth has been tepid but a couple indicators show continued increases overall. </div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhYq5jjhB-aFIReRFAwKjomb0MbFviUfjeoa7hUZx6afVeraKZYc9FAKo5_KnKtEo-ioOYzagVpx7lfvM25z4ae8dLcgP5paVAJg2DmR5MfOeIfaaCE0afBtLjiJhzSBl0UJ8JY/s1600/20170915+Median+Real+Earnings.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="574" data-original-width="1458" height="251" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhYq5jjhB-aFIReRFAwKjomb0MbFviUfjeoa7hUZx6afVeraKZYc9FAKo5_KnKtEo-ioOYzagVpx7lfvM25z4ae8dLcgP5paVAJg2DmR5MfOeIfaaCE0afBtLjiJhzSBl0UJ8JY/s640/20170915+Median+Real+Earnings.JPG" width="640" /></a></div>
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Average weekly hours worked has also spiked. Even if wages fail to materially increase, the increase in hours worked should lead to extra total wage income.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg5ko8XcMejm17BORqmH9_tlxoFXmKnfnvtmT6cNLxfBRoR9vA3WrwJ5ar4-a_ajDrLmrn12slkVJOIYxzYlaBnKfI2DhAJtbUA_cjG8xXOlOfjHLrjqyDBXXbz42D0B7_NshEQ/s1600/20170915+Weekly+Hours+Worked+US.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em; text-align: center;"><img border="0" data-original-height="558" data-original-width="1457" height="245" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg5ko8XcMejm17BORqmH9_tlxoFXmKnfnvtmT6cNLxfBRoR9vA3WrwJ5ar4-a_ajDrLmrn12slkVJOIYxzYlaBnKfI2DhAJtbUA_cjG8xXOlOfjHLrjqyDBXXbz42D0B7_NshEQ/s640/20170915+Weekly+Hours+Worked+US.JPG" width="640" /></a><br />
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The magnitude of the increase will be amplified by years of QE.<br />
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Again, like most markets, corresponding moves aren't always immediately and 1 to 1 in nature. It can take a bit before the market comes to an epiphany - that "Ah ha!" moment.<br />
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<b>4) The US economy and the global economy seems to be doing okay. Everything seems safe-ish. </b><br />
<b><br /></b> Looking at some very basic metrics such as GDP and unemployment here. The growth has continued from then till now, and we are still on track for additional growth. I get it. We expected an explosion of growth after Trump and that hasn't really happened, but things are not worse than they were two years ago! Yet rates and USD in real terms have round-tripped back where we were two years ago.<br />
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<b>5) Another trigger would come from the rest of the world. </b><b>With FX these last few years being a game of lemmings where countries deviate little from the lead of the United States. It might be time to wonder if we are due for a pick-up of catalysts and rhetoric from other countries concerning the strength of their currencies, as well as disappointments from other central banks regarding their hawkish policies.</b><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgnWJUJkeZNldZyzPgu9waxHsPySw9kPxGoANxyLUro3zSvyzPMqb7DZqkaDY6_SYsQliFf-qoZ_sWZ32DDl4IJO9_jem2fnnH-w434y_h2Ty8DAzyV2Ir4y1exrmk0h3B499aq/s1600/20170915+Lemming.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="360" data-original-width="480" height="300" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgnWJUJkeZNldZyzPgu9waxHsPySw9kPxGoANxyLUro3zSvyzPMqb7DZqkaDY6_SYsQliFf-qoZ_sWZ32DDl4IJO9_jem2fnnH-w434y_h2Ty8DAzyV2Ir4y1exrmk0h3B499aq/s400/20170915+Lemming.jpg" width="400" /></a></div>
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Europe and China need to be the main culprits. With that said, many in the rest of the world are involved as well.<br />
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First China: they recently got rid of the deposit requirement for FX forwards - something they implemented two years ago to slow the devaluation of RMB. This should make it less expensive for companies and investors to buy dollars while selling the yuan. And guess what? The dollar is cheaper now.<br />
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Although the change itself is mostly symbolic and not necessarily a force to be reckoned with, it can potentially serve as a canary in the coal mine for future attempts to stem RMB appreciation.<br />
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Europe growth has been very strong - and the FX market has responded accordingly. This is a bit of a question mark for me - interest rate futures' pricing is hovering around record lows for a ECB rate hike by June 2018.<br />
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If we get some convergence there, that would mean Euro sells off a bit - helping dollar bounce - but in terms of the intricacies of the ECB at this point in time? *Shrug*<br />
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Now the rest of the world. The most dollar sensitive countries are obviously in EM. Many of the Asian countries have already shown signs of intervention against their strengthening currencies as they start to accumulate reserves, specifically in dollars.<br />
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Exhibits below for your entertainment:<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjhonEknxgEUTQT-yWhLXkC04IJgxv1as3Mhi4Te9KU2KVQVYBSygAJzbyoEO1qDIR5r-fBPkxAoklkfiQyzdCVGGLNTvsum2j_KasENBNPIEZ7qT1ESikICQfZw-3mwtQT5izm/s1600/20170917+India+USD+Purchases.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="561" data-original-width="958" height="374" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjhonEknxgEUTQT-yWhLXkC04IJgxv1as3Mhi4Te9KU2KVQVYBSygAJzbyoEO1qDIR5r-fBPkxAoklkfiQyzdCVGGLNTvsum2j_KasENBNPIEZ7qT1ESikICQfZw-3mwtQT5izm/s640/20170917+India+USD+Purchases.JPG" width="640" /></a></div>
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Eventually, dollar shorts should notice. Again, I've noticed in the past that these trades in these currencies often preceded moves in US rates. Canary number two for the aviary, anyone?<br />
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By the way, shout out to fellow contributor Shawn who shared an article articulating what is beginning to transpire across the world - you can read all about it via the link below.<br />
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<span style="color: blue;"><b><a href="https://www.cfr.org/blog/few-words-dollar">https://www.cfr.org/blog/few-words-dollar</a></b></span><br />
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<b>6) The Donald and the Fed are changing quickly. Stanley Fischer is gone. Uber-liberal Brainard will probably follow. Who's Trump going to nominate? Probably Republican-type candidates - guess what? They are usually more likely to be hawkish than dovish.</b></div>
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To me, that in itself is compelling thought. What can potentially make it more compelling? Well, the Donald seems to have started working well with Democrats as of late. Let's project that further - if they can manage to pull together a deal for tax reform, even if it's not super impactful, it will be symbolic. </div>
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It will symbolize that Donald can get things done - I would think the rates markets would immediately do a 180 and return to the post-election regime. Yes, I am projecting here, but think about the risk reward of your positioning at this point. Should the rates go higher or lower? Should dollar go higher or lower? </div>
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If he does pass through tax reform. What's next? Tariffs? Additional government spending? Again, just projecting here...Inflation?!?! *Gasp*</div>
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<b>7) Lucky number 7. I'm big on sentiment - from the eye test, I think people are pretty close to limit short USD at this point. Just a hunch.</b></div>
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Hey! It's free blog okay? Take it or leave it! :)</div>
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<b>Are there catalysts?</b></div>
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I hate catalysts. </div>
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It's been a lonnnnngggg post, please bear with me a little bit longer. A lot of what I have detailed are projections - but that's macro trading to me - you have to anticipate in order to correctly speculate. Maybe that's why I'm often a little bit early on these things. Hmmmm.</div>
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But often your returns and risk-reward decay swiftly if you wait for a clear catalyst to materialize. So... in my opinion, proceeding with some caution is probably better than proceeding before it's too late.</div>
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<b>General House Cleaning:</b></div>
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<b><a href="http://macro-man.blogspot.com/2017/06/oh-how-market-turns.html"><span style="color: blue;">Stocks short</span></a></b> - Yeah threw in the towel like Mcgregor on August 29th. Geopolitic risk is definitely subsiding. Let me explain.</div>
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It's not that there can't be another crazy development tomorrow. But the market is just not ready to go down just yet - traders should know what I'm talking about. My Ah ha! moment was when North Korea launched their "hydrogen bomb". </div>
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Along with the hurricane, the market was confronted with a copious amount of "bad" news. Equities gapped down, but by the end of the day, it actually covered the gap and closed higher!</div>
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Disgusting, I know. But looks like the indexers and VIX carry monkeys will get to make money for a while longer.</div>
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<b>EM equities</b> - this has been an impressive move. I believe this is a multi-year trend <a href="http://macro-man.blogspot.com/2017/04/its-goin-down-in-dm-hit-me-up-on-em.html"><span style="color: blue;"><b>when I detailed it long ago</b></span></a>.</div>
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With that in mind, it has run up a lot. If the dollar does bounce, we are probably going to get a shake out of the weak hands and late comers to the trade.<br />
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<b>Cocoa and sugar</b> - <a href="http://macro-man.blogspot.com/2017/08/cuckoo-for-cocoa-futurescommodity-catch.html"><span style="color: blue;"><b>both bottoming nicely. I still maintain sugar might be a tad too early. Cocoa looks really good and I strongly believe it can rip</b></span></a>. I even did some work to do a seasonality adjustment. Below is the inverse inventory on a seasonally adjusted basis vs price. Please excuse the poorly drawn arrows.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh60n15oTVSVRyBFTFvr-PQe5G8od-CSQLlHJpmyGU57b7FjeTXtfHnWh2Znavkuu5V3uSJjlbh1QaEXGmfHBIrBWnw6inM6nH0z1pUcYyh2t4dygrvP79mCTx5gIkuyCOW9-EL/s1600/20170917+Cocoa+Inventory+Seasonality+Adjustment.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="761" data-original-width="1346" height="360" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh60n15oTVSVRyBFTFvr-PQe5G8od-CSQLlHJpmyGU57b7FjeTXtfHnWh2Znavkuu5V3uSJjlbh1QaEXGmfHBIrBWnw6inM6nH0z1pUcYyh2t4dygrvP79mCTx5gIkuyCOW9-EL/s640/20170917+Cocoa+Inventory+Seasonality+Adjustment.JPG" width="640" /></a></div>
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Anyways, have a good week guys.<br />
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<br />Macro Clownhttp://www.blogger.com/profile/17196568155114537578noreply@blogger.com176tag:blogger.com,1999:blog-34323687.post-5320158154657341072017-09-15T17:49:00.002+01:002018-04-14T01:55:26.439+01:00Happy Trails, Hugh Hendry. <div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">I was going to post this as a comment in the prior post...but I got rolling into full "post" length. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The Macro world </span><a href="http://www.zerohedge.com/news/2017-09-14/markets-are-wrong-hugh-hendry-shuts-down-his-hedge-fund-here-his-parting-letter" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">lost one of its godfathers this week</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">. Hugh Hendry has thrown in the towel and closed his fund. If you've been in this business long enough, you have been through what Hugh Hendry is dealing with. </span><a href="https://www.bloomberg.com/news/articles/2017-09-14/hugh-hendry-s-eclectica-fund-closes-after-15-years-amid-losses" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">You can hear it in his voice in this interview</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">--there are elements of regret....and relief. You can't keep a guy like him down--he'll be back, stronger than ever.</span></div>
<b id="docs-internal-guid-40e8a205-866c-0157-6e7c-8bb99a7d2a63" style="font-weight: normal;"><br /></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">But how did this happen? Hendry claims, or at the very least implies, the global macro model is “broken” due to higher costs, low carry and fewer opportunities. What does this mean for the asset class? He's absolutely right from a business perspective. So much has conspired against global macro. Not only has the regulatory environment changed to make running the fund more difficult and expensive, but fund raising has become more difficult, time consuming and onerous, and leverage is *dramatically* harder to come by and more expensive than it was 5, 10 or 20 years ago. From an economic perspective, there is simply less alpha to go around when central banks are putting their thumb on the scales. Combine that all with flat curves and zero carry and it is amazing some funds are able to slog on as long as they have--I remember when the 4-5% carry from unencumbered equity was a nice pot of cash at the end of the year. No longer.</span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">When I talk to pension fund and endowment managers today about how they invest their money, they want a more persuasive value proposition than "I'm smarter than the average bear." They see the market as divided up into pots of risk premia for them to exploit with their long-term time horizons. That is why they have this blood lust for private equity--historical performance argues there is a premium there that will generate superior long term returns. While that is debatable--look at my thoughts on the subject </span><a href="http://macro-man.blogspot.com/2017/07/its-106-miles-to-illinois-pension-fund.html" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">here</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">, and </span><a href="http://macro-man.blogspot.com/2017/07/yield-hungry-yield-hungry.html" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">here</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">--that is the conventional wisdom being sold by armies of investment consultants, and as I highlight above, these investors </span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-weight: 400; vertical-align: baseline; white-space: pre-wrap;"><u>need </u></span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">returns beyond the “LIBOR-plus” benchmark for global macro. </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">To make matters worse, as Hendry highlights, low rates and central bank intervention have radically changed the correlation of the asset class. If you are simply bullish, how are you going to generate alpha to justify your fees? If you are bearish, you are rolling a very large rock up a very large hill. If you are trying to find the uncovered opportunities that will differentiate your returns...well...you better hope it is far enough off the beaten path to not fall victim to the next bout of liquidity injections from the central bank of your choice, or the unwind of the previous avalanche. Without low correlation, there's simply no value. </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Combine all that with money money money...Competition is fierce. Fees are still high. And the fuses are short. Tough to see how the genie will go back into the bottle for the asset class. </span><br />
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span>
Shawn<br />
<a href="mailto:TeamMacroMan@gmail.com">TeamMacroMan2@gmail.com</a><br />
<a href="https://twitter.com/EMinflationista" target="_blank">@EMInflationista</a></div>
EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com11tag:blogger.com,1999:blog-34323687.post-21519410987385814872017-09-13T20:14:00.001+01:002018-04-14T01:55:38.938+01:00Bitcoin: Is It a Currency, or Something Else?<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">I’m going to go ahead and kick this hornet’s nest and see what happens. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Bitcoin. </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">There, I said it. </span><a href="https://www.cnbc.com/2017/09/12/jpmorgan-ceo-jamie-dimon-raises-flag-on-trading-revenue-sees-20-percent-fall-for-the-third-quarter.html" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Jamie Dimon’s diatribe</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> yesterday got me thinking again about Bitcoin cryptocurrencies at large. I’ll be the first to admit that I am an old school currency trader--I know first hand there is little else that draws the admiration of the citizenry of </span><a href="https://www.caracaschronicles.com/2017/05/18/one-million-percent-later/" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">an autocratic regime with a hyperinflationary monetary policy</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> than the US dollar. </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">If you were bold enough to click through to that link, you see that there has been 1 million percent inflation in Venezuela since Hugo Chavez took power in 1999. But that was way back in mid-May--now it is </span><a href="https://www.caracaschronicles.com/2017/08/03/three-million-percent-later/" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">3 million percent and counting</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">. The Venezuelan Bolivar lost 2/3s of its (already worthless) value in only 77 days.</span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">When a third world autocrat implements capital controls, the objective is generally to prevent the citizenry from fleeing the local financial system for the safety and security of the US dollar. In Argentina, until early last year you couldn’t just waltz into a bank and ask to have your pesos converted into dollars--moreover, grain exporters couldn’t freely repatriate dollars without a morass of taxes and red tape. So even from a corporate perspective, you can see the power of a currency system that would enable you to circumvent government controlled financial systems.</span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">And that’s what makes Jamie Dimon nervous!! Few banks are as highly levered to the interaction of the US and international financial system than JP Morgan. Freedom of movement and libertarian absolutism is the basic, global value proposition for cryptos in the foreseeable future. </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">So what is, or should, Bitcoin be worth? I guess I am old enough that I have to go back to my international economics textbook to match up Bitcoin with the definition and uses of a currency: </span></div>
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<li dir="ltr" style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; list-style-type: disc; text-decoration: none; vertical-align: baseline;"><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">A currency is a medium of exchange that is used to buy or sell assets, goods and services. We think of it as being tied to a country or central bank, but it can be stuff like airline miles too--a currency I try to convert into dollars, magazines or airfares as quickly as a Venezuelan with a sack full of bolivars.</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">What is a </span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">good</span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> currency? A solid currency needs trust. The entity and monetary system backing the currency needs to be predictable, legally stable, and widely recognized. Some currencies FX traders think of as lousy currencies, like the </span><a href="https://www.bloomberg.com/quote/USDTRY:CUR" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Turkish Lira</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> have depreciated dramatically--but are still legally recognized tender in the international financial system. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="217" src="https://lh4.googleusercontent.com/PovcLPt3GmkVTVxsQHSRKkRsThT8m8TIhZqd5R3YucyL3IM6Q8szz5Fe6a83nEuosWxZ69YJCX5lv5CQLMvfS3RSsN3PaHaSAL_AwILyBXRWPIExe_QsUaOOTejyL3LuIOXdcn_o" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="393" /></span></div>
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<li dir="ltr" style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; list-style-type: disc; text-decoration: none; vertical-align: baseline;"><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">A good currency must be a store of value--as a TRY holder, I would have lost money in USD/TRY over the past several years, but I would have made some of that back holding TRY assets at much higher interest rates over the years--and I would have had the freedom to convert to USD at my pleasure any time during that period. So the currency held its value--it didn’t go completely to pieces like the currencies of Venny or Zimbabwe.</span></div>
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<li dir="ltr" style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; list-style-type: disc; text-decoration: none; vertical-align: baseline;"><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Most simply, the changes in value of such currencies are driven by trends in real interest rates and the domestic expected return on capital relative to foreign return on capital.</span></div>
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<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">How does Bitcoin fit into that system? Here’s where I am going to throw out my fuddy duddy opinions and we'll see if the millennial set or the cryptocurrency true believers can set me straight.</span></div>
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<li dir="ltr" style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; list-style-type: disc; text-decoration: none; vertical-align: baseline;"><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Medium of exchange</span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">: Bitcoin has a $65bn market cap and trades millions of dollars per day. You can get online, set up a wallet and buy into it relatively easily and virtually anywhere. That makes it a widely recognized medium of exchange. Sure, it is well off the billions of dollars traded every day in EMFX currencies or trillions in DM currencies. But it is growing and will probably rival small country currency volumes soon. So a modest but growing “check” here. </span></div>
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<li dir="ltr" style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; list-style-type: disc; text-decoration: none; vertical-align: baseline;"><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Store of value</span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">: Ok, so help me out here--I am long bitcoin--what interest rate am I going to draw on that? Can I lend it out? Nobody is borrowing in bitcoin. I see value in using it as a dark-web currency but not as an asset. I understand the value in being outside the traditional financial system but the </span><a href="https://www.bloomberg.com/news/articles/2017-09-04/china-central-bank-says-initial-coin-offerings-are-illegal" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">PBOC moves last week</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> show that governments have an incentive to make lives difficult for crypto traders and ICOs, even if they can’t completely shut it down. </span></div>
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<li dir="ltr" style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; list-style-type: disc; text-decoration: none; vertical-align: baseline;"><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Which leads to the last bullet...</span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Trust</span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">: Do I have any confidence in what it will be worth tomorrow? Not really. Do I think it will be equally liquid and accepted non-country based asset, like gold? Not really. Will it be overwhelmed by some other cryptocurrency long-term? Maybe. Will governments and established banks crush or co-opt it? Maybe. The tin-foil hat crowd will be happy to opine on how this will be the first discussion topic at the next annual </span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">illuminati </span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">jamboree.</span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">I'd love to buy into this--it really does appeal to my anti-establishment impulses. But I’m from Missouri on this one. Show me. </span></div>
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<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">No interest rates, no monetary policy, no capital markets, no derivatives...but long on hope and the blockchain story. I don’t even want to get into the “fair value”, bubble talk, or astronomical recent returns--I just need convincing on how cryptos are defined as a </span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">currency, </span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">and how that will interact with the establishment. </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">And again to throw my lot in with Jamie--blockchain is a totally different topic--that is a technology that has enormous value for payment systems and corporate supply chains. Even if and when the technology is there to implement blockchain’s promise of the “smart contracts”, distributed bookkeeping, and real-time payments, I still want to get paid in dollars! </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">And I don’t think that is going to change in my lifetime. Am I just behind the curve here? Convince me otherwise! </span><br />
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Shawn<br />
<a href="mailto:TeamMacroMan@gmail.com">TeamMacroMan2@gmail.com</a><br />
<a href="https://twitter.com/EMinflationista" target="_blank">@EMInflationista</a></div>
EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com20tag:blogger.com,1999:blog-34323687.post-9833699187030827152017-09-08T18:18:00.001+01:002018-04-14T01:56:02.268+01:00Linkage Friday: Another Bullish Voice on China, and Views of France's Labor Reform Just thought I would dash off a few quick thoughts before we all throw in the towel for the weekend.<br />
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Macro: Wow...the horsewhipping of USD continues unabated, with some very big levels either getting taken out--1.20 in EUR, .81 in AUD, and CAD approaching 1.20. Not to be left out is the kiwi which is finally outperforming after getting kicked around for much of the metals-driven rally over the past three months. Looking at EUR crosses you see....nothing. This is more of the same--China demand, risk-on, reach for yield...welcome back, 2006. We missed you.<br />
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If you are young enough that you weren't on a trading desk back then, well this is what it was like.<br />
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Interesting to note the strong bounce higher in yields after the gap overnight--I would guess more flow driven/profit taking at this point but no doubt the theme is intact. Stocks not quite the BTFD theme but notable there was absolutely zero follow through to the modest selloff earlier in the week.<br />
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I'm going to take the easy way out and post a few links to some insightful things I saw this week:<br />
<a href="https://www.wsj.com/articles/the-markets-big-puzzle-what-is-happening-to-growth-and-inflation-1504698403" target="_blank"><br /></a>
<a href="https://www.wsj.com/articles/the-markets-big-puzzle-what-is-happening-to-growth-and-inflation-1504698403" target="_blank">The WSJ had a great article</a> on the "mystery", or "conundrum" if you go back to the Alan Greenspan days, of higher growth paired with stubbornly low inflation. I like how this one identifies what are really productivity gains--tech companies bringing new capital investment and business methods to staid industries that allow them to cut prices as they grow, rather than encouraging demand-push inflation.<br />
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<a href="https://www.wsj.com/articles/low-inflation-gives-fed-pause-on-raising-rates-again-this-year-1504812023" target="_blank">This article</a>, which was almost in response to the one above, goes into the Fed's thinking on the topic. I continue to be torn on if they will pull the trigger and hike in December--the easing of monetary conditions driven by the market moves above tilt me towards the "hike" camp but it won't take much more bad data or low inflation figures to give them an excuse to sit on their hands.<br />
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Getting back to the China issue, I'll again cite the folks over at BCA, who had this chart and commentary, which is supportive of the guys at China Beige Book that I mentioned earlier this week:<br />
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<i>"<span style="background-color: white; color: rgba(0 , 0 , 0 , 0.7); font-family: "source sans pro" , "helvetica" , "arial" , sans-serif , "hiragino kaku gothic pro" , "meiryo" , "hiragino sans gb w3" , "noto naskh arabic" , "droid arabic naskh" , "geeza pro" , "simplified arabic" , "noto sans thai" , "thonburi" , "dokchampa" , "droid sans thai" , "droid sans fallback" , , ".sfnsdisplay-regular" , "heiti sc" , "microsoft yahei" , "segoe ui"; font-size: 15px; white-space: pre-wrap;">China’s August macro data to be released in the coming weeks will likely surprise to the upside. Some market signals from global assets that are traditionally sensitive to Chinese growth trends have shown remarkable strength of late, likely signalling further upside in the Chinese business cycle. Metals prices have been firm across the board. Stock prices of metals producers in major producing countries have significantly outperformed their respective benchmarks, likely pointing to an imminent upturn in China's leading economic indicator. The Baltic Dry Index, the benchmark for bulk shipping rates that is largely driven by Chinese materials demand, has stayed elevated, probably a sign that China's bulk commodities intake has remained fairly robust. All of this still paints a bullish backdrop for global risk assets, despite the obvious geopolitical risk."</span></i><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg3ABixwydxuTwOdmg_4xddObccnW5zrBnIgJ2h8Tjry5R_aT0SYlCXfID-wV-wGwCTsd3DX96apUKl4hU5ED7wQVWFqKXlMKIxAEm50FU_OSVF4aL_7adRbyDEdAbl7V1XxDxzXQ/s1600/Capture2.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="366" data-original-width="491" height="238" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg3ABixwydxuTwOdmg_4xddObccnW5zrBnIgJ2h8Tjry5R_aT0SYlCXfID-wV-wGwCTsd3DX96apUKl4hU5ED7wQVWFqKXlMKIxAEm50FU_OSVF4aL_7adRbyDEdAbl7V1XxDxzXQ/s320/Capture2.PNG" width="320" /></a></div>
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At this point, someone is going to have to tell me why this is going to stop...my facebook feed just popped up a "memory" from five years ago where a friend had posted an article called, "China's Mother of All Debt Bombs" and asked me my opinion. I said it would blow up sometime in the next 1 to 20 years. I'll chalk that up as the right call. </div>
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Lastly a couple of links to <a href="https://www.project-syndicate.org/commentary/macron-france-economic-reform-labor-code-by-philippe-aghion-and-benedicte-berner-2017-09" target="_blank">The Two Pillars of French Labor Reform</a>, and <a href="https://www.project-syndicate.org/commentary/macron-labor-reform-france-growth-by-dani-rodrik-2017-09" target="_blank">Macron's Labor Gambit</a> at Project Syndicate. I think these, especially the second one, sum up the situation rightly--the reforms are big, in that they are being proposed in a political environment where they could actually pass...but they are small in that they are really incremental relative to how many other country's operate. They will only be successfully if they are the beginning of a reform movement, rather than Macron's political suicide. Only that will drive the resurrection of the "animal spirits" in France and drive profits and employment. </div>
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As I mentioned earlier, I think that is worth taking a swing at French equities relative to other eur-based equity indices, although I must admit I am not knowledgeable enough on the components to know how the risks pair off. After all, I'm just a bond guy...I'll leave that to the equity pros...</div>
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Shawn<br />
<a href="mailto:TeamMacroMan@gmail.com">TeamMacroMan2@gmail.com</a><br />
<a href="https://twitter.com/EMinflationista" target="_blank">@EMInflationista</a><br />
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<br />EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com9tag:blogger.com,1999:blog-34323687.post-65477297631683343432017-09-06T21:06:00.002+01:002018-04-14T01:56:29.523+01:00CAD to China to Copper to FroJo <div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">So the BoC </span><a href="http://www.bankofcanada.ca/2017/09/fad-press-release-2017-09-06/" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">went ahead and did it. </span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> That’s two hikes, and unwinds the cautionary/pre-cautionary hikes of 2016 when oil prices were code blue. </span></div>
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<b id="docs-internal-guid-71c071d3-58c5-41dc-8637-bca9e4690a5c" style="font-weight: normal;"><br /></b></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">“</span><span style="background-color: white; color: #333333; font-family: "roboto"; font-size: 10.5pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Recent economic data have been stronger than expected, supporting the Bank’s view that growth in Canada is becoming more broadly-based and self-sustaining.” </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">They’ve been telling us that for the past two of three years, is it really happening now? Poloz and Co. go on to mention that the global economy is picking up, and more synchronous than in the past--which is also consistent with some of the strong, or at least persistent, growth data out of China, and the spectacular move higher in base metals, which portends continued strong manufacturing growth. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">But we haven’t seen much outperformance in CAD….at least not compared to its commodity currency brethren. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="247" src="https://lh4.googleusercontent.com/2-xYdb2v5p2w9_fW_xLIFjWaHMyPmI2UnsdMdKlfyiFhb2p_k-Pu5shtXemk5MdhUDIaVzxLyTUvxxAeEaasEIh7O6vm75-bZSLbNy8FjrytV-aWu63t2KxxTdXOwERfeJg9lWDI" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="260" src="https://lh5.googleusercontent.com/5_9Ip5mXJ248kg8hYFbfLsxc_jq8y0OaqPJylTh7mtPa3MYQQaXHvUhdmNOwVJ8e5MPI85s8-bg54pxFnWhZYk2G0mCQlH7vTq99JocTaNitRfBuSgoHUOUhKdiDPPN-gg8ZIguw" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="272" src="https://lh3.googleusercontent.com/ZRFxoQdh1oFDZOPvpgQ_vWaz5aF-mcY1ZBZ-vY-TMVGnac_KP-6JeY2458_5CGf1r3l8LtMZn2WnHX3rTBsx9Smx_SBB3M1M3RWjZybglZU86-x4SrCbeaqGAfa1mYSnUY8PgI2s" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">As I mentioned yesterday I thought we would see a slowdown in China and metals prices by now that would cause commodity currencies to give up some of their YTD gains. John Maudlin had some good points on this from one of his buddies at </span><a href="http://chinabeigebook.com/" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">“China Beige Book”</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">, a research outfit I’ve never heard of but one that made some very good points on the resilience of the China credit/growth re-boom: </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">“</span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11.5pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">A lot of this now seems consensus – as all good assessments should in hindsight – but if you recall at the time (mid-to-late June) there was growing sentiment that (1) the economy had already peaked for 2017 and was now starting to slow; (2) deleveraging was having a major effect on corporates; and (3) the commodities sector had likely peaked in Q1 and was now in slowdown mode as well. Our data undercut all of these.”</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11.5pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">“</span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11.5pt; font-style: italic; font-variant: normal; font-weight: 700; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">CBB data show aluminum firms wildly outperforming the current market narrative, </span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11.5pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">seeing broad Q2 gains in revenues, profits, volumes, output, and new orders, as well as cash flow, which jumped into the black for the first time in our survey’s history. The why is less clear than the what, but one obvious possibility is aluminum is the latest recipient of some of China’s excess liquidity. “</span></div>
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<b style="font-weight: normal;"><br /></b></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11.5pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">“In Q1, corporate reporting to CBB showed credit tightening was limited to interbank markets. In Q2, it hit firms: bond yields and rates at shadow banks touched the highest levels in the history of our survey, and bank rates their highest since 2014. So why did borrowing not collapse, denting the broader economy? One reason is what we call the “Party Congress Put.” While borrowing did see a mild drop for the third straight quarter, companies’ six-month revenue expectations remain robust in every sector save property. Companies assume deleveraging is transient, likely because they are skeptical the Party will allow economic pain in 2017. </span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11.5pt; font-style: italic; font-variant: normal; font-weight: 700; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">It will not be until 2018 when we find out whether deleveraging is genuine – because it won’t be until 2018 that it will actually hurt.”</span></div>
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<b style="font-weight: normal;"><br /></b></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11.5pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Bottom line, these guys mention the deleveraging and tightening is hurting property firms and cash flow….but that isn’t hurting the broader economy….yet. When does the other shoe drop? Well, not until well after the party congress at the end of October. Will copper stop its crazy run higher before then? </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11.5pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="317" src="https://lh4.googleusercontent.com/s1gPaymQaEYdUWt6uy80_p3XwTCAWKalvPPo5g9QhPzbxtxuCUrTx2q-o3En9mZGbtoq18QIOrxRYJ2w7WT0T3X7OL_uwZnmui97fGM4Z0I2jo1qhCjtJOD2_s2fOxeAeFI0yamt" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="309" /></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11.5pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11.5pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">EMFX and the commodity currency club is poised for continued strength-- with inflows continuing--and <a href="https://www.bloomberg.com/news/articles/2017-09-05/fed-s-brainard-says-caution-warranted-on-further-tightening" target="_blank">yesterday's Brainard comments </a>signaled the Fed is not going to get in the way any time soon. If inflows persist and start to seep into FDI and the broader economies in commodity driven economies...welcome back to 2005-2006. Canada doesn't seem like a recipient of those flows so long as oil is still stuck in the 40s, but that theme should be intact for those driven by base metals in Australia, Chile, maybe even South Africa. Low natgas and oil prices will benefit those countries too...as well as soft commodity exporters like Argentina. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11.5pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11.5pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">What else is going to throw sand in the gears? North Korea? the ECB? A trade kerfuffle or a NAFTA trainwreck? Not seeing any likely culprits here. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Back in the Atlantic, no macro opinion on the natural disaster front...just prayers to everyone in the path of Hurricane Irma. </span></div>
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<b style="font-weight: normal;"><br /></b><span style="font-family: "arial"; font-size: 11pt; white-space: pre-wrap;">Took me a sec to realize that was what was driving frozen concentrated orange juice futures.</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="355" src="https://lh6.googleusercontent.com/qawlMW8YSDI4LAL53Dl6G69xVNwVYQ4XAPBQr30yJoRsSAQVaZ70H94a0PAtqbs68Ux__4SbDIaSZYlmOBXPMPCVniNMojR-r_p4map7nreudgrlM-yyf4a_Nshicq_1mDRMbfPB" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="320" /></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: 14.6667px;">At first I thought it was the Dukes. Which I say just to have an excuse to post this, which I think every trader should be required to watch as a part of his or her training. </span></span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">Stay safe out there!! </span><br />
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Shawn<br />
<a href="mailto:TeamMacroMan@gmail.com">TeamMacroMan2@gmail.com</a><br />
<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;"></span><br />
<a href="https://twitter.com/EMinflationista" target="_blank">@EMInflationista</a></div>
EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com12tag:blogger.com,1999:blog-34323687.post-38305369699163051572017-09-05T05:32:00.001+01:002018-04-14T01:56:46.598+01:00Did Norges Bank Just Drop a Bomb? <img src="https://live.barcap.com/NYF/docgen/image.do?includeURL=false&saveAsDialog=false&file=1504581543488%2Epng" /><img src="https://live.barcap.com/NYF/docgen/image.do?includeURL=false&saveAsDialog=false&file=1504581543488%2Epng" /><span style="font-family: "arial"; font-size: 11pt; white-space: pre-wrap;">Welcome back to the rat race everybody. I hope you enjoyed the holiday or pseudo-market-holiday, depending on your address. What did we learn while at the beach? </span><br />
<span id="docs-internal-guid-d05d09e4-504c-4a3b-0347-9e0255e3d89c"><br /></span><br />
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<span id="docs-internal-guid-d05d09e4-504c-4a3b-0347-9e0255e3d89c"><span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">Rates rally, gasoline prices rocket higher, but the God of US Breaks has spoken….”5y inflation 5 years forward shall be between 2.21 and 2.28.” </span></span></div>
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<span id="docs-internal-guid-d05d09e4-504c-4a3b-0347-9e0255e3d89c"><span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;"><img height="232" src="https://lh5.googleusercontent.com/IOf2XG1RxRFyT0nwM-AGkrhTjL7fsxh28ZHsys4hHFH4qUFkmGxY_dWeieA_GT9HcYueIXcpU6qIp4XuXZwiSGiUgXpxsMbKIUOirwGnZgWHoe0OM_gu5Fhs6-ibNHcbCRlrfu7v" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="475" /></span></span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">I had a couple of drinks with an ex-colleague...he’s French and was in town on vacation with his Italian girlfriend. Judging by the tail end of these graphs, they weren’t the only one on the famous European August holidays. </span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;"><img height="232" src="https://lh5.googleusercontent.com/oIJmnWLAvpc4GvANMt-by5ykKoG4YoMHPDjpOA96gHIiFo-c7KnPpJwyYnRdtALsr8z4moclIv74Xs9TIMLgkuXJj90FkoZtRYVRlXM_Qho0CnHBQOnYjGR1KHGzwFoclZbW7VL-" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="475" /></span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">Similar story over in FX land...EUR continues to be the story of the year. ZAR made a run higher over the past couple of weeks, but nothing else notable. </span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;"><img height="183" src="https://lh3.googleusercontent.com/ImWeIj-WAcBcSWdCNQyPlePdOUYOzRbwfE3W1h2HKETc80TaqvYl2FgFcD1uXaqGgzQiyAtbKoYpzz8ZnBKrLWnKfcpQwgLMmZKZiq2IU2JTaSVmRSMt2jZ56qb_VaSEC1d2C1v_" style="border: none; transform: rotate(0rad);" width="400" /></span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">Which brings us to the always fascinating world of swap spreads. Hey, a market where something happened the past two weeks? In 2y spreads, a move down from 26 to 21 in a week gets some people very, very excited. </span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">This means as rates were rallying, 2y swaps were outperforming 2y UST. Is this the debt ceiling rearing its ugly head? My guess here, and I'm open to other interpretations from those a little closer to the source... is that the FTQ bid from more North Korea noise combined with illiquid markets and the debt ceiling pushed more macro guys into buying eurodollars rather than front end UST futures. </span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">I’ll take the other side here and call for a move back towards the mid-20s... I think the move in rates is a little overcooked, and even with Trump’s historic and downright bewildering ineptitude, I can’t see how a Republican president takes a Republican congress to the mat on the debt ceiling. They will find a way. And if North Korea nukes us, you could do worse than to be long swap spreads! </span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;"><img height="183" src="https://lh6.googleusercontent.com/NJvzMBll3UlfyK7MXmXBSQxRi47zk8AKVl4QdEiyzbSNS2rnfzjyRkIykNn8YT3vYdev8F0p7-JlymTQfkohmCH2m5oUdjvFxnQ0hFcRXG2gXfxoSrksgOb6DDNyXpkC-QmlGOFe" style="border: none; transform: rotate(0rad);" width="400" /></span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">While it may not manifest itself in the front end of the US curve, there was another story that hit the tape late last week that I think is very important. Norges Bank, the manager of Norway’s bottomless pot of oil loot, </span><a href="https://www.nbim.no/en/transparency/submissions-to-ministry/2017/bonds-in-the-government-pension-fund-global/" style="text-decoration-line: none;"><span style="color: #1155cc; font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">released a letter to the government </span></a><span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">in which they call for some major changes to their management of their massive fixed income portfolio. </span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">To quote (emphasis mine): </span></div>
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<span style="font-family: "arial"; font-size: 11pt; font-style: italic; vertical-align: baseline; white-space: pre-wrap;">“For an investor with 70 percent of his investments in an internationally diversified equity portfolio,</span><span style="font-family: "arial"; font-size: 11pt; font-style: italic; font-weight: 700; vertical-align: baseline; white-space: pre-wrap;"> there is little reduction in risk to be obtained by also diversifying his bond investments across a large number of currencies.</span><span style="font-family: "arial"; font-size: 11pt; font-style: italic; vertical-align: baseline; white-space: pre-wrap;"><br class="kix-line-break" /></span><span style="font-family: "arial"; font-size: 11pt; font-style: italic; vertical-align: baseline; white-space: pre-wrap;"><br class="kix-line-break" /></span><span style="font-family: "arial"; font-size: 11pt; font-style: italic; vertical-align: baseline; white-space: pre-wrap;">The benchmark index for bonds currently consists of 23 currencies. </span><span style="font-family: "arial"; font-size: 11pt; font-style: italic; font-weight: 700; vertical-align: baseline; white-space: pre-wrap;">Our recommendation is that the number of currencies in the bond index is reduced. This will have little impact on risk in the overall benchmark index.</span><span style="font-family: "arial"; font-size: 11pt; font-style: italic; vertical-align: baseline; white-space: pre-wrap;"><br class="kix-line-break" /></span><span style="font-family: "arial"; font-size: 11pt; font-style: italic; vertical-align: baseline; white-space: pre-wrap;"><br class="kix-line-break" /></span><span style="font-family: "arial"; font-size: 11pt; font-style: italic; vertical-align: baseline; white-space: pre-wrap;">We propose that the Ministry goes back to a specific list of currencies for the bond index rather than leaving this decision to the index supplier... </span><span style="font-family: "arial"; font-size: 11pt; font-style: italic; font-weight: 700; vertical-align: baseline; white-space: pre-wrap;">The most liquid market for bonds is currently that for US Treasuries, followed by those for bonds issued by countries in the euro area and the UK...An index consisting of bonds issued in dollars, euros and pounds alone will be sufficiently liquid and investable for the fund.</span><span style="font-family: "arial"; font-size: 11pt; font-style: italic; vertical-align: baseline; white-space: pre-wrap;">”</span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">The letter says that the new benchmark would be roughly 58% US Treasurys, 38% European debt, and 8% UK Gilts. Here is the breakdown now: </span></div>
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<span style="font-family: "arial"; font-size: 11pt; font-style: italic; vertical-align: baseline; white-space: pre-wrap;"><img height="266" src="https://lh6.googleusercontent.com/snSGpD4O36MpCDbjBDgDR1hQ5YpoVFW3i2KG8xdJUI6SxG5I4n26-nzY3np1ksBcy_sf8NZfZGz_zuWIQPioorgNNeHbVurzRQuPE0GzXyg1DmlUi0MSSQysh7BlCehOzbWvqrRd" style="border: none; transform: rotate(0rad);" width="400" /></span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">The big losers here are Japan, Canada, and the entire emerging market bucket, which the letter goes out of its way to bag on. </span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">So at some point in the next year there is likely to be some outflows from EM local debt and into US, Euro and UK paper. While that should be nominally positive for my long swap spread trade, the larger impact will be felt elsewhere. </span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">This move away from EM debt is a radical departure from the commitment this fund made to the EM asset class back in 2012, when they abandoned the market-cap weighted index method, which put them into big, heavily indebted countries like Japan, Spain and Italy, at the expense of EM. They switched to a GDP weighted method, which was a big move. </span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">Here is what happened to the net holdings of Mexican government debt when they made the switch: </span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;"><img height="268" src="https://lh6.googleusercontent.com/zESPo_UgQTc0QFL5y8fWQSnCEpSXVDIYi1kbucOm3zBda-WlrXBo-bqwX91Kq4IxV0dtyNzSnEuYY2cqu4AkqPZmNfoczMYZpDjADp9TQLgbYe6fLBlglZDzzFiqvMpmmEIZu0Nz" style="border: none; transform: rotate(0rad);" width="400" /></span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">That's right, in a $70bn (now $100bn) bond market, Norges basically went from nothing to $4bn in 2012, and then to $6bn in 2013...but not right away...they started buying <i>after</i> the selloff driven by the taper tantrum, and didn’t stop the rest of the year. Rates ground lower relentlessly and swap spreads were the story of the year. </span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">So the move to reverse that could be a big deal in EM, especially for debt-thirsty countries like Mexico that rely on foreign investors to plug their fiscal gap. </span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">And given the size of the fund and its exemplary quality of management over the years, this could be a leading indicator for other SWFs and large pension fund managers. Their conclusions are relatively radical--zero diversification benefit...liquidity problems...a poor index composition...you can feel the distrust in the asset class when you read the letter. </span></div>
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<span style="font-family: "arial"; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;">Will this be the day the second generation of EM inflows rolled over? Stay tuned! </span><br />
<span style="font-family: "arial"; vertical-align: baseline; white-space: pre-wrap;"><br /></span>
Shawn<br />
<a href="mailto:TeamMacroMan@gmail.com">TeamMacroMan2@gmail.com</a><br />
<a href="https://twitter.com/EMinflationista" target="_blank">@EMInflationista</a></div>
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</span>EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com10tag:blogger.com,1999:blog-34323687.post-73338759053888226572017-08-24T13:55:00.001+01:002018-04-14T01:57:08.976+01:00Dallas Fed Paper: PCE Inflation to be Revised Higher<br />
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Here's a little red meat for the inflation and monetary policy junkies out there. Two economists at the Dallas Fed released </span><a href="https://www.fedinprint.org/items/feddel/00049.html" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">a short paper</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> yesterday entitled, "Getting a Jump of Inflation.” </span></div>
<b id="docs-internal-guid-9ba98f2b-144f-7abe-5180-e700c6abe4e2" style="font-weight: normal;"><br /></b>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">I was hoping for something like an inflation </span><a href="https://www.youtube.com/watch?v=Qiw3vVy_eN8" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">jump to conclusions mat</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">.But it’s even better than that. These guys totally buried the lede...they close with this (emphasis mine): </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">“The BEA estimated April 2017 PCE</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">inflation at 1.72 percent (as of August</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">2017) and June 2017 PCE inflation</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">at 1.42 percent. Based on Fed survey</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">results, it’s likely these figures will be</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">revised higher—to 1.90 percent and 1.55</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">percent, respectively—at the next annual</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">revision in summer 2018. </span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 700; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Thus, the</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 700; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">economy may be closer to the Federal</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 700; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Reserve’s definition of price stability</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 700; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">than is commonly believed.</span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">”</span></div>
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<br />
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Take five minutes and read this thing--they describe how only a couple of high-frequency data points (the Fed aggregate prices paid index and to a lesser extent, ISM prices paid) predict inflation just as well as the second and third revisions of the PCE data set. Bottom line--these guys see underlying price pressures that aren’t yet showing up in the headline inflation data. Could be a sign that the market has gotten too complacent on Fed expectations, and the market is overextended in the usual suspects like short USD and breakevens. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">And commodities keep on truckin’</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="300" src="https://lh6.googleusercontent.com/IKrreOYQX38ODkl7ICInIA3JAfmG6amfZjVHBt_XBcEID2gxBs2_41vaG9gbr1EDHhdtSvZyH4bAPnovKmb19Sg4-9TVj17RBImFVGWO7UTnq6b-1zmb10nbDf4ZKgE7QC3w93jO" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="590" /></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Copper is partyin’ like it’s 2012...the luxury shopping malls of East Santiago will soon again be teaming with shoppers spending new found loot. Wasn’t so long ago that $3/pound seemed like a cruel memory of a lost time to your average Chilean economist. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="317" src="https://lh3.googleusercontent.com/HvU7gkJUmqZ3hU9yuhBbw810Pj08cbZWe0vJ1aeO_0gomucpW5yWJ6PNl-Ez6CrUzd7K4HCnl8fDizd2KkSV8AQt0-18T4tF5TYtcPetvhDUZOtvSZmIxm1doRjpYZEawKT8ieg2" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="532" /></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Woe be the trader that ignores the ides of September...or Jackson Hole!</span><br />
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span>
Shawn<br />
<a href="mailto:TeamMacroMan@gmail.com">TeamMacroMan2@gmail.com</a><br />
<a href="https://twitter.com/EMinflationista" target="_blank">@EMInflationista</a></div>
EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com39tag:blogger.com,1999:blog-34323687.post-71018652073355999942017-08-22T18:00:00.000+01:002018-04-14T01:57:24.031+01:00Remember the Thing with North Korea? KRW is Still a Good Short<span style="background-color: white;"><br /></span>
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<span style="background-color: white;"><span style="color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Oh so long ago, in the halcyon days before "</span><span style="color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Charlottesville</span><span style="color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">", our number one worry was a nuclear conflict with North Korea. </span><span style="color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Hmm</span><span style="color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">, yes, it has been a slow news cycle, hasn't it? </span></span></div>
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<span style="background-color: white;"><span style="color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">And while we're on the subject, am I the only one that noticed the word "</span><span style="color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Charlottesville</span><span style="color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">" is already being used as a pejorative adjective to describe all that is wrong with the country, the far-right, intolerance, or whatever is stuck in your craw, no different than places like "Watts</span><span style="color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">", "Stonewall", or "Midtown". Trouble is </span><span style="color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Charlottesville</span><span style="color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> *was the home of one of the Fathers of our Country and the author of the Declaration of Independence*. He's on the money. Literally. Sorry guys, this one's taken. </span></span></div>
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<span style="background-color: white; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">But I digress. Getting back to North Korea, or the relative lack of interest after cooler, or at least, simpler, heads prevailed, probably won't stand as the last word on the subject. </span></div>
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<span style="background-color: white;"><span style="color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">I clipped this chart from the folks at </span><span style="color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">BCA</span><span style="color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">. They highlighted how a short </span><span style="color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">KRW</span><span style="color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">/long </span><span style="color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">JPY</span><span style="color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> position is still near historical extremes, and sets up nicely for a risk-off move, especially one driven by events on the peninsula which would drive both sides of the trade--a weaker KRW, and an unwind of short JPY carry trades.</span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="533" src="https://lh6.googleusercontent.com/2dJOOa7Es943LgNouyfUovu26htBvhcPp_W9uVpXcIDUNNYfPOgx_wPY61KSNIabR_GD7LPD02NHu1uhvrk4NOi0LSyUHGTxpiGiuQCgkzJUgTBKu5mw9TDR4_pW1uLQ_1y7K2GQ" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="488" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">I suspect part of the driver here has been not only the pickup in manufacturing demand over the past year or so, but also the massive inflows into EM, which for some reason benefits South Korea, despite looking nothing like an EM country. </span><a href="https://www.bloomberg.com/news/articles/2017-08-21/foreigners-are-finally-getting-cold-feet-on-south-korean-bonds" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">This article in B</span><span style="background-color: white; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">loomberg</span></a><span style="background-color: white; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> </span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">noted that the bond market saw only the second weekly outflow of the year--a trend which is can't last when yields are as pathetic as they are there. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">I did </span><a href="http://macro-man.blogspot.com/2017/07/asia-fx-waking-up-from-summer-doldrums.html" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">kick this idea around a few weeks ago</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">, and while I noted the market has been complacent on Trump’s propensity for craziness, I thought there would finally be a bid for USD after six months of a good old fashioned horse whipping. Well, maybe that’s finally starting to turn...time will tell. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Looking at the chart, we’ve seen a good 2-3% move in both USD/KRW and the JPY cross since late July--the cross is finally breaking out of a range that has held since the US election, and usd/krw continues to be a cheap short for a number of geopolitical risks, EM/China risk, and “USD fuerte” risk. And still screens cheap! Carry on….</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Great to have abee and Detroit Red going live again... this subsidiary of TMM2 is going to put out the “Gone Fishin’” sign until Labor Day--although there will be more abuse of spreadsheets and databases than fishing. But I will probably break down and post if something really compelling pops up. Stay safe out there.</span></div>
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Shawn<br />
<a href="mailto:TeamMacroMan@gmail.com">TeamMacroMan2@gmail.com</a><br />
<a href="https://twitter.com/EMinflationista" target="_blank">@EMInflationista</a><br />
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<img src="https://live.barcap.com/NYF/docgen/image.do?file=1503371847583%2Epng&includeURL=false&saveAsDialog=false" /><br />
<img src="https://live.barcap.com/NYF/docgen/image.do?file=1503371895679%2Epng&includeURL=false&saveAsDialog=false" />EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com1tag:blogger.com,1999:blog-34323687.post-68398123377929798432017-08-21T04:29:00.001+01:002017-08-23T19:58:06.312+01:00Cuckoo For Cocoa/Commodity Catch Up/Stock Market Topping Process/China From Ground LevelLong-time no post - hope everyone's been well. Was away on a 3 week+ trip to China (the 6th country I've traveled to this year!). Had some difficulties overcoming the great firewall. Good to see Shawn holding things down!<br />
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A long one today, so please bear with me.<br />
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<b>Cuckoo For Cocoa</b><br />
<b><br /></b> This picture can sum up how I feel about Cocoa:<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhi04f25mmHMCGRAzH_JUYYYUmntIvSPF8jymMegeyRfzzJJKLELEeJc2yjckcvtoLelSMakHh8nh8B7QLoXlZlLIrf3WcQdtlwXjE1gYdGppoiiVIkUb26NTfp31peCCXz9jW0/s1600/20170709+Cuckoo+for+Cocoa+Puffs.gif" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="250" data-original-width="504" height="197" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhi04f25mmHMCGRAzH_JUYYYUmntIvSPF8jymMegeyRfzzJJKLELEeJc2yjckcvtoLelSMakHh8nh8B7QLoXlZlLIrf3WcQdtlwXjE1gYdGppoiiVIkUb26NTfp31peCCXz9jW0/s400/20170709+Cuckoo+for+Cocoa+Puffs.gif" width="400" /></a></div>
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We've talked about <a href="http://macro-man.blogspot.com/2017/03/where-are-my-mannersfood-for-thought.html"><span style="color: blue;">grain commodities in past by looking at supply and inventory</span></a> numbers to gauge risk-reward and general surplus vs deficit of crops.<br />
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As I have stated in the past, the growing cycle of grains is relatively shorter than that of softs. Rips are usually less sustained in grains - long bear markets and short sharp spikes - than in softs - as there are massive cycles of bull and bear markets in softs.<br />
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We had a sizable rip in grains, specifically in wheat, but it was not sustained. Still too much supply out there and we might have to wait until next year before we start falling into deficit and price can sustain an up move.<br />
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Moving along.<br />
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Sitting here now looking for opportunities to gain diversified returns, I think there are opportunities setting up to get long softs, specifically cocoa, and to an extent sugar as well.<br />
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The reasoning is similar to things I've cited in the past grains post - these are two commodities have fallen so much in price that they are bound to return from a stage of surplus to deficit as production cuts back due to low prices.<br />
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In cocoa, the previous shortage from 2014-2015 has been replaced by a supply glut. There are even talks that the current levels in prices are leading South American producers to <a href="http://www.denverpost.com/2017/02/03/cocoa-crop-price-rout-cocaine-south-america/"><span style="color: blue;">abandon cocoa for cocaine</span></a>!<br />
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That leads me to think the bottom is in or pretty close.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgb5mdKEnMoww8MA-g6cyg8lTB2JwoVkVdAeQUNEPAgbTzgvnCkWPaU3OWlwErWH0-Epw-UnldPE86GC7HM4eEeS0pq5iMEc9brISY58hThpGFIgq9wcAxLBGlf_RYNqVzS5eic/s1600/20170817+Cocoa+Prices.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="609" data-original-width="1226" height="316" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgb5mdKEnMoww8MA-g6cyg8lTB2JwoVkVdAeQUNEPAgbTzgvnCkWPaU3OWlwErWH0-Epw-UnldPE86GC7HM4eEeS0pq5iMEc9brISY58hThpGFIgq9wcAxLBGlf_RYNqVzS5eic/s640/20170817+Cocoa+Prices.JPG" width="640" /></a></div>
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Cocoa surplus is now well telegraphed. We've experienced a notable build up in stockpiles. As these inventories start trending off the highs, we are in danger of seeing a reversion in price as well. Below is a chart of 1/x price vs ICE cocoa inventory.</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiMyo9RcB7NJ5by_x0DI21bECVCe_bcFbPq-Qag4aiJ26yBHCed2IhGihUqlxXc8P940xpplSLm18qZ8-C8FvxVuJz-W3JAYh5_6-2T5KBUZGaf7_60N06J7zInWFki4fwKHZ9K/s1600/20170724+Cocoa+Inventory+vs+Price.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="1200" data-original-width="1600" height="480" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiMyo9RcB7NJ5by_x0DI21bECVCe_bcFbPq-Qag4aiJ26yBHCed2IhGihUqlxXc8P940xpplSLm18qZ8-C8FvxVuJz-W3JAYh5_6-2T5KBUZGaf7_60N06J7zInWFki4fwKHZ9K/s640/20170724+Cocoa+Inventory+vs+Price.JPG" width="640" /></a></div>
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The last production print for cocoa is still high but that is a slow-moving factor and should be priced in. In fact, it is slow enough for you to potentially fade it. </div>
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Outside of the commonly documented turmoil in the Ivory Coast (the biggest cocoa producer in the world), you can see other big cocoa producers (Ghana, Indonesia, Brazil etc.) also fluctuates based on price cues. With prices declining, then bottoming over a year's time, cocoa production should start fading accordingly.</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjb64tRFiUwpfV0wiY9fY-glk2oRyF7tHoTU2j3PTjmCs9mM383A6TFHYdNBumByKS6r8-YC31ZMz7luQHlGwQXXoWDRTYvsiM_BgSKMLUY3EHq2gSlxoPvjxC7vPPDP3aEY4mX/s1600/20170729+Cocoa+Production+Breakdown.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="1200" data-original-width="1600" height="480" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjb64tRFiUwpfV0wiY9fY-glk2oRyF7tHoTU2j3PTjmCs9mM383A6TFHYdNBumByKS6r8-YC31ZMz7luQHlGwQXXoWDRTYvsiM_BgSKMLUY3EHq2gSlxoPvjxC7vPPDP3aEY4mX/s640/20170729+Cocoa+Production+Breakdown.JPG" width="640" /></a></div>
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Oh yeah, and people are heavily short this thing. Squeeze, anyone?</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj8vU7h1BFQaCGYbXkTkMYAdejSAkbhu1kXhbk9-GY9isyeUDi-QZ6KvTl4EjX4Oe_yTlgJSukHxfeouBLnH7YH2qND1sjwcCl0PJmRUALo6H5Y85qp-tME4dcBWfU8IfJG6oLB/s1600/20170721+Cocoa+vs+Positioning+vs+Stockpiles.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="612" data-original-width="949" height="412" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj8vU7h1BFQaCGYbXkTkMYAdejSAkbhu1kXhbk9-GY9isyeUDi-QZ6KvTl4EjX4Oe_yTlgJSukHxfeouBLnH7YH2qND1sjwcCl0PJmRUALo6H5Y85qp-tME4dcBWfU8IfJG6oLB/s640/20170721+Cocoa+vs+Positioning+vs+Stockpiles.JPG" width="640" /></a></div>
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Sugar has similar fundamentals to cocoa. </div>
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We've had the boom back in 2011 when there were 300+ sugar mills in the South of Brazil. By the end of the bust, mills and companies were mired in debt. You basically had 90 mills left in Q4 of 2015. The thing with sugar mills is that they need to be retrofitted every few years. </div>
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The many mills left in Brazil needed to go through this process. However, retrofitting a sugar mill is like replacing ink for those old cheap printers - the ink cartridge itself would be $20 for a printer that only costed $25. </div>
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So it was safe to assume that a number of mills in the group remaining would shut down due to a combination of too much debt and a much-lowered sugar price. </div>
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The long bottoming process meant sugar had moved from a surplus crop to a deficit crop. On Feb 22, 2016, there was huge buying interest in sugar going into the close. After markets were closed, ISO announced a surprise sugar shortage. Sugar ran up from the lows to ultimately hit 24 handle. Turns out the catalyst was El Nino. </div>
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After the price surge, stockpiles printed the lowest they've been since 2011. Production declines in Brazil stopped and started to trend higher, although India production still didn't show a clear nadir. That was enough to send prices back down.</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgNpets8tq35V-eR4Ed_NXEpZKuZq4WYc5UQE_n5UImFoogU_rwjhzuAYrafav_RDteti9WV7lvPI3bG8rkT1XVt47hu7bdb7_Bg3_Ex2dWUOLDiqxFAxtJnzJS5pcYrqtzvhCJ/s1600/20170820+Sugar+Prices.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="617" data-original-width="1215" height="325" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgNpets8tq35V-eR4Ed_NXEpZKuZq4WYc5UQE_n5UImFoogU_rwjhzuAYrafav_RDteti9WV7lvPI3bG8rkT1XVt47hu7bdb7_Bg3_Ex2dWUOLDiqxFAxtJnzJS5pcYrqtzvhCJ/s640/20170820+Sugar+Prices.JPG" width="640" /></a></div>
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Turn the page to today, The height of the price move has led to a turn of the fundamentals. Brazil production increased but Indian production is still low. If we sustain lower prices a while longer, Brazil production would be in danger of pulling back again. </div>
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This one might be a little early - we should eventually see the sugar surplus move back into deficit and witness a surge in prices again. </div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgppmnQoFCbl99VYVfHkLF-COHFPVoC-6Rm_r3lMQiqktie1cDOoRrXtbz3nbLwgs80j4V5StLOqz86fsLnZ9nScfuUu_ssCrKPrwDAwAxfJ8k9hHjYt3kTM7mBQTBS7VPA-Bs4/s1600/20170721+Sugar+Brazil+%2526+India+Production+vs+Price.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="665" data-original-width="1003" height="424" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgppmnQoFCbl99VYVfHkLF-COHFPVoC-6Rm_r3lMQiqktie1cDOoRrXtbz3nbLwgs80j4V5StLOqz86fsLnZ9nScfuUu_ssCrKPrwDAwAxfJ8k9hHjYt3kTM7mBQTBS7VPA-Bs4/s640/20170721+Sugar+Brazil+%2526+India+Production+vs+Price.JPG" width="640" /></a></div>
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One concern here is that stockpiles have only increased modesty - which is why I think we are a little early here. And since the market is short, we could potentially see a squeeze that materializes as a fake out for longs. </div>
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Something to keep in mind.</div>
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<b><br /></b> <b><br /></b> <b>General Commodity Catch Up</b><br />
<b><br /></b> First, looking at the commodity world as a whole. Commodities have been a hugely undervalued versus stocks. This trend doesn't last forever and historically will mean revert.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh0OfGnGOGHNA8wLS3hHr6eiiZKgl6sJWZlJruwOUgq2JTOnad1QnCV1iDg28D0b-uBG63LRVyDCSssM8xevv3Svf3LTlXgWv_ubu49-jdgLA4A5mfZAXsj94ie1ULrKpPZdie8/s1600/20170724+CCI+Index.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="1200" data-original-width="1600" height="480" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh0OfGnGOGHNA8wLS3hHr6eiiZKgl6sJWZlJruwOUgq2JTOnad1QnCV1iDg28D0b-uBG63LRVyDCSssM8xevv3Svf3LTlXgWv_ubu49-jdgLA4A5mfZAXsj94ie1ULrKpPZdie8/s640/20170724+CCI+Index.JPG" width="640" /></a></div>
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It is hard to time this trade as the overall commodities "bucket" encompasses many things - each subcategory of commodities, and even different commodities in each subcategory can possess stark differences in the underlying supply and demand dynamics.<br />
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With that said, there should be general lift off in commodities soon.<br />
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There is something peculiar here to note.<br />
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The base metal index has tracked US Breakevens well. But recently, we've started to see a break.<br />
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Copper supposedly has a Ph.D. in economics and I assume the other base metals are its colleagues.<br />
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Copper's data is more easily procured so from this point on in the post, I'll just use that as a proxy.<br />
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Copper has been drifting higher and higher after a long period of consolidation post-Trump elections win. Obviously Trump = building stuff, better economy, etc. so it made perfect sense. Breakevens also exploded higher as the above would mean inflation.<br />
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However, interestingly, the break of correlation can mean a few things: either<br />
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1) Copper supply and demand dynamics are so in support of a higher price that it is meant to trade higher regardless or...<br />
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2) Ph.D. copper disagrees with Ph.D. interest rates.<br />
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Funny, it's not like we ever have Ph.D.s disagreeing with each other when it comes to the economy.<br />
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Combining inventory data from LME, COMEX and the Shanghai Metal Exchange, we can see that there could be some fundamental reasons why copper is getting bid.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhGaAJDD7Rpg1rTF4FLT_pccwfowZFXdewSA8R6p86MkaltX88e8kzVlD0hTqkB3AME7ZRODkx_9ENE6X7Obm9ZlHaQKlX8zrw1PYmG2RDZd4f7qje-lrz7jvrxotznPR54hvqv/s1600/20170820+Copper+vs+Warehouse+Inventory.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="542" data-original-width="891" height="387" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhGaAJDD7Rpg1rTF4FLT_pccwfowZFXdewSA8R6p86MkaltX88e8kzVlD0hTqkB3AME7ZRODkx_9ENE6X7Obm9ZlHaQKlX8zrw1PYmG2RDZd4f7qje-lrz7jvrxotznPR54hvqv/s640/20170820+Copper+vs+Warehouse+Inventory.JPG" width="640" /></a></div>
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<br />
Whether that draw inventory is driven by real economic growth requires more digging - I recall a time when Red Kite drew record amounts of inventory as a speculative ploy, only to lose their shirts and possibly their kites when prices did not respond accordingly.<br />
<br />
Something is definitely fishy here. Don't have a strong inclination - need to ponder some more. Ready the bathtub.<br />
<br />
<b>Stock MarketTopping Process</b><br />
<b><br /></b> Got some flak for <span style="color: blue;"><a href="http://macro-man.blogspot.com/2017/07/repost-nassim-taleb-thanksgiving.html"><span style="color: blue;">the Nassim Taleb Vix post</span></a>. </span>The market ran up 270bps-ish against me and is now back down.<br />
<br />
Face not ripped off? Check.<br />
Shirt still on me? Well, more like a tank top but...Check.<br />
<br />
Most of you who have ample experience in the market knows that a market top and bottom is usually a "process". With a not much higher high in the Nasdaq and Spooz and clear lower highs in the Russell (read leading indicator of risk) and transports, I feel pretty good.<br />
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<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjq2LbOWEMOfp5Tdu5dx31FYK0vc1ADqsc_nw4grBWlyHiCr9Bexd9dunXmDnzwFoOFxPtNWUIMwPt3FccoUxfdpkyXvj4949cAR9d95q5a1XuJFrWwkIh906tjOxgPxLbycljD/s1600/20170820+Index+Prices.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="474" data-original-width="1600" height="187" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjq2LbOWEMOfp5Tdu5dx31FYK0vc1ADqsc_nw4grBWlyHiCr9Bexd9dunXmDnzwFoOFxPtNWUIMwPt3FccoUxfdpkyXvj4949cAR9d95q5a1XuJFrWwkIh906tjOxgPxLbycljD/s640/20170820+Index+Prices.JPG" width="640" /></a></div>
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How good?<br />
<br />
Good enough to build on the position. I'm getting conviction that even if we haven't seen the top of the bull market, we will at least have a proper correction (at least 15% to 20%)<br />
<br />
I'm up on the trade for now - we will see how things go. Keep looking for this lower lows and lower highs.<br />
<br />
Back in the spring, I thought this bull market still had a year plus to run. Now? I am not so sure. <a href="http://macro-man.blogspot.com/2017/06/oh-how-market-turns.html"><span style="color: blue;">There are some cracks there in the economy and nobody can argue whether we are at the beginning of the end of our current cycle</span></a>.<br />
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Trust me, as somebody still trying to land a seat at a proper macro fund - I would strongly prefer that I am wrong here and the bull market continues.<br />
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But as speculators, we play the cards dealt and like I said, we will see how things go.<br />
<br />
Oh, and obviously keep an eye on the VIX. like we've detailed in the past, there are <a href="http://macro-man.blogspot.com/2017/05/market-volatility-reports-of-my-death.html"><span style="color: blue;">market structure reasons alone where a sustained higher VIX can lead to a selloff</span></a>.<br />
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<span style="color: blue;"><br /></span> <span style="color: blue;"><br /></span> <b>China From Ground Level</b><br />
<b><br /></b> My trip was purely recreational so I would be selling you guys short if I was to make up intelligent sounding, yet bogus market insights.<br />
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With that said, whether you find them insightful or not, some observations:<br />
<br />
- We all know China is huge in its consumption of all things. But being there. Standing amongst seas of people is awe-inspiring.<br />
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- The transition for China from a producer nation to a consumer nation is a massive undertaking - but it might not be as difficult as people think. The population there has been living under the monotony that comes with communism for so long, they yearn for consumption.<br />
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- Everywhere I went, people bought the best things, wore the best brands and drove the best cars (that they could afford) - so it's not just the foreign luxury brands, it's also the Chinese brands. The population has a much more pent-up urge for things, for goods.<br />
<br />
- People take pride and enjoy their work, even it's menial. I'm not sure if it's a cultural thing or a standard of living thing. For example, a Mcdonald's employee here gives you attitude. While there, they are respectful and seems, on the surface, happy. The job in both countries is considered a minimal salary type of role.<br />
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- I visited a lights factory when I was there. Although machinery and automation are starting to take over, labor is still relatively cheap for semi-automated, semi-skilled type of factory jobs.<br />
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- The public bathrooms are disgusting.<br />
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- The snacks are so much better.<br />
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That's it, guys.<br />
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As much as I love traveling, it feels pretty damn good to be back. Happy Monday.<br />
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</div>
Macro Clownhttp://www.blogger.com/profile/17196568155114537578noreply@blogger.com12tag:blogger.com,1999:blog-34323687.post-11733610452575083212017-08-15T05:20:00.001+01:002018-04-14T01:57:40.591+01:00The William Dudley Speaks...Still Waiting For Inflation<div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">I might be the last generation of people that remembers EF Hutton. It was a middle-of-the-pack brokerage that got bought out as the industry consolidated in the late 80s. They had these ads that had the catchy tagline, “When EF Hutton speaks, people listen.” </span></div>
<b id="docs-internal-guid-449ded55-e41e-5fc5-5b9b-e3d464aa7d80" style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Today, when the William Dudley speaks, people listen. Let’s go straight to </span><a href="https://www.reuters.com/article/us-usa-fed-idUSKCN1AU22O" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">today’s AP interview </span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">with the man himself and drop the money quotes: </span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: white; color: #333333; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">“My outlook for the economy hasn't changed materially since the beginning of the year. Continue to look for growths around 2%, slightly above trend, growth sufficient to continue to tighten the labor market.”</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: white; color: #333333; font-family: "arial"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Steady as she goes, then?</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: white; color: #333333; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">“If (economic growth) evolves in line with my expectations, I would expect -- I would be in favor of doing another rate hike later this year.”</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: white; color: #333333; font-family: "arial"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Fair enough...not backing off...we hear you, Bill. But really, why do you still want to hike?</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="background-color: white; line-height: 1.2; margin-bottom: 15pt; margin-top: 0pt;">
<span style="background-color: white; color: #333333; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Now the reason why I think you'd want to continue to gradually remove monetary policy accommodation, even with inflation somewhat below target, is that 1) monetary policy is still accommodative, so the level of short-term rates is pretty low, and 2) and this is probably even more important, financial conditions have been easing rather than tightening. </span></div>
<div dir="ltr" style="background-color: white; line-height: 1.2; margin-bottom: 15pt; margin-top: 0pt;">
<span style="background-color: white; color: #333333; font-family: "arial"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Stocks are hot...right. </span></div>
<div dir="ltr" style="background-color: white; line-height: 1.2; margin-bottom: 15pt; margin-top: 0pt;">
<span style="background-color: white; color: #333333; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">There are long lags between getting to a tight labor market and that actually showing up in higher wages, and those wages then pushing into inflation.</span></div>
<div dir="ltr" style="background-color: white; line-height: 1.2; margin-bottom: 15pt; margin-top: 0pt;">
<span style="background-color: white; color: #333333; font-family: "arial"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Ok, here’s where it gets interesting...despite unemployment at or below their estimate of full employment (or NAIRU, if you will), we’re still waiting for that “lag” to stop crushing inflation readings.</span></div>
<div dir="ltr" style="background-color: white; line-height: 1.2; margin-bottom: 15pt; margin-top: 0pt;">
<span style="background-color: white; color: #333333; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">What we have to do, though, to discern is, what we see on inflation, is this temporary or is this something that's going to be more persistent? I think the jury is out on that.</span></div>
<div dir="ltr" style="background-color: white; line-height: 1.2; margin-bottom: 15pt; margin-top: 0pt;">
<span style="background-color: white; color: #333333; font-family: "arial"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Can you give us a “best-by” date on that jury? That leaves this….which may be one of my favorite central banker quotes of the year:</span></div>
<div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: white; color: #333333; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">“The reason why inflation won't get up to 2% very quickly on a year-over-year basis is because we've had these very low inflation readings over the last 4 or 5 months. So it's going to take time for those to sort of drop out of the year-over-year calculation.”</span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: white; color: #333333; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">To summarize: </span></div>
<ol style="margin-bottom: 0pt; margin-top: 0pt;">
<li dir="ltr" style="background-color: white; color: #333333; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; list-style-type: decimal; text-decoration: none; vertical-align: baseline;"><div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: white; color: #333333; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Growth, still good</span></div>
</li>
<li dir="ltr" style="background-color: white; color: #333333; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; list-style-type: decimal; text-decoration: none; vertical-align: baseline;"><div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: white; color: #333333; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Labor market, still tight</span></div>
</li>
<li dir="ltr" style="background-color: white; color: #333333; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; list-style-type: decimal; text-decoration: none; vertical-align: baseline;"><div dir="ltr" style="line-height: 1.2; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: white; color: #333333; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Inflation, still invisible. But just you wait until the low numbers roll out of the index. Bill...I know some Argentines that can take care of that for you. Call me. </span></div>
</li>
</ol>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="background-color: white; line-height: 1.2; margin-bottom: 15pt; margin-top: 0pt;">
<span style="background-color: white; color: #333333; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">But I think if you look at inflation sequentially, in other words what's inflation likely to actually do over the next 6 months, I'm expecting somewhat higher readings than what we've had over the last 6 months.”</span></div>
<div dir="ltr" style="background-color: white; line-height: 1.2; margin-bottom: 15pt; margin-top: 0pt;">
<span style="background-color: white; color: #333333; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Rookie question...how has your inflation forecasting performed over the last five years? </span></div>
<div dir="ltr" style="background-color: white; line-height: 1.2; margin-bottom: 15pt; margin-top: 0pt;">
<span style="background-color: white; color: #333333; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">In fairness to Bill and the Fed, inflation forecasting is a mug’s game. Let’s take a look at a few charts that might shed light on what he’s thinking. </span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="306" src="https://lh3.googleusercontent.com/PjYNrb1YN6Vvx7B5rwNlwgmsAzgw74sQY0N-5ZVU3MXhRVvNs8nBRKUlIDcDz4U5A6rRcFZnc0Vlgc4QRv2empFaGpkfUqA_cDOqacYAq3Guf1dVGGxjULwLSoYDAiXP2hJkYKSy" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="539" /></span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">This is the “inflation dashboard” at the Atlanta Fed. I’m not sure how often labor costs have been at the 99th percentile while expectations have been in the 20s, but it must be pretty rare. </span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Let’s drill down into labor costs: </span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: white; color: #333333; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="274" src="https://lh4.googleusercontent.com/F9qNoDI9PlxkJG1fvCU3Vk17PS_JPlb3Yw5vfO5f22MbOR2IetJ52v7zB4FutHEJo3C4tAc1gTy2um0eY4gP4Dno-YPLmocORioAG-yWfw4Y6_PYlCQWxbbVvX6t1vDXZWuweldh" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="334" /></span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: white; color: #333333; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Creeping higher--I’ll agree with Bill, the jury is still out here. Could settle in at the top of the band.</span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: white; color: #333333; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="503" src="https://lh4.googleusercontent.com/uWz5gj3rXOZ-bjDnMRcCKY8prWsDtOBlr0Co1bBbqXV0zV-QZe4F_1PVQk-h8hm_SfSBB72aKw-zpnl7j0SKB2Ec5kY-HdiVRUruhTzqtY1EqjI4MQ2KGgwi2O9rzpmVmmC8GBJN" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="601" /></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: white; color: #333333; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">More people are getting raises. Although I wager this is more typical, and the past several years have been anomalous. Again, supportive. I’ll save space and dispense with the unemployment and first-time claims chart...you know what they look like. </span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: white; color: #333333; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">So Dudley is right--the labor market is showing signs of tightness beyond simply the unemployment rate. But what about prices? </span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Both headline and trimmed mean PCE are trending downwards. No signs of trouble here. </span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="284" src="https://lh3.googleusercontent.com/yApaBfMwFXYodfgFTbCgQbCUPZpRLOtVgA7jd6l7rdyDqezpr8ufEmuOA3tAYPNhTNy-i8UY_BHb_GpgYmBOhkvxtYZzwkCt-w9VHcFb0Ksposqw2pRqGOqt54AiSAVHiUSaQCa5" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="474" /></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The broader CPI trimmed mean index looks even more encouraging for the dovish camp. </span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="352" src="https://lh4.googleusercontent.com/2In_plzFeCRN4y0gbJnGMfouCGQnjAIE3Jqa4CLYBF_y2uxdp2t2OZRtSrsjb-1hpOJQiHhkImHg2ziz_UMfd1OunlBR4ONlJHnQX17YbAYrhl6mP3CdHZ_gHu1MpHaxDKBiL-gO" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="416" /></span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">And his points on asset prices being in line with the state of the economy? Well, credit expansion doesn’t argue there is anything amiss. Again, consistent with the “steady as she goes” approach to monetary policy. </span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="446" src="https://lh5.googleusercontent.com/-HQ4HMVN6YmANAt74DEi21KtNP8-a4F6xSelxhZjhQXbVvT76hqK-3z_yjmi9-a9nTY_2tymlfz5PkUn0UepGV2SsCyn8j8jr5pde9EWP4aDainWPD4YPWqb5bNyDkufZn6wCzlI" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="473" /></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Same for capacity utilization--some room to run on the runway here. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="383" src="https://lh6.googleusercontent.com/ksdO73BKJm6f7tu9zz8epX8yHZb6Hegv_fxlKb_WMM5CCWuckuYMY8YOJjiZ0MYGbGxzeZt5CrhDANiSqMma9WhKBoqmA6Ul5gvtworSOxsqeVyDPTj4O3kzJ4mrYTxKT8KYE5eu" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="452" /></span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">With inflation expectations crawling back into their grave, the market has clearly cast its lot with the dovish camp. </span></div>
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<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">In all...I hate to say it...but the evidence ties out to much of what Dudley says. He glossed over the *actual* inflation data way too easily--something the TIPs market clearly picked up on--and there isn’t much to suggest that is going to change anytime soon….other than labor costs. So we’re back in the cycle of watching the data for the next clue on monetary policy. </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Only now do I think the market has it about right on the odds for a December hike at something like 30%....that is about how we have been conditioned to fade Fed governor pronouncements. </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Regarding the broader point on risk appetite, and financial conditions--carry on!! All there is here is a tepid endorsement of what we knew already--yet high-frequency data is showing some signs of weakness. Let the party go on…</span></div>
<br />
Shawn<br />
<a href="mailto:TeamMacroMan@gmail.com">TeamMacroMan2@gmail.com</a><br />
<a href="https://twitter.com/EMinflationista" target="_blank">@EMInflationista</a><br />
<br />EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com18tag:blogger.com,1999:blog-34323687.post-7620800321910133482017-08-14T05:31:00.004+01:002018-04-14T01:57:57.975+01:00Around the Horn With TMM2: China, VIX, High Yield, SPX...even AAPL! <b id="docs-internal-guid-2bf4bf53-defe-61a8-e1a4-82c226c7e50a" style="font-weight: normal;"><br /></b>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">TMM2 doesn’t quite have the “Gone Fishin’” sign out for the balance of the month, but it is pretty close. For lack of any persuasive ideas, I’ll roll through a few charts as well, and save the compelling stuff for later in the week. </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Earlier this evening the monthly batch of economic data from China </span><a href="https://www.reuters.com/article/us-china-economy-activity-idUSKCN1AU04Q" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">came out right on schedule</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">, and right on lousy too. Industrial production and retail sales were notable misses. Certainly isn’t disastrous enough to portend an end to the world as we know it, but it is supportive of this graph, which is </span><a href="http://www.zerohedge.com/news/2017-08-13/china-macro-data-misses-across-board-july-yuan-shrugs" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">one of the favorites</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> with our friends over at Zero Hedge. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="210" src="https://lh5.googleusercontent.com/8-fX4CNnXNcG4zIzWBnckk7PWpLOn9SxHxBFw_7ptKWQK8XYwJ7Ko2j-VT-SSiryQxMmgENO71fxPpU7vWBeYq0rXfgAEwGCSXTTqFGN4bW3r_UZJCj1ZzkeMusASniqTPwqgQ7w" style="border: none; transform: rotate(0rad);" width="400" /></span></div>
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<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Is the “credit impulse” theme starting to take shape? I think the jury is still out, but nothing that has happened domestically or in developed markets has done much to change my mind. I do agree it will be a bigger and bigger theme as we come into Q4. I don’t think global demand is poor enough to be a big setback for the Chinese machine--time will tell if the slowdown in credit growth turns into a driver for global macro. </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">That dovetails nicely into this chart from what can only be considered the opposite of Zero Hedge...Bloomberg. It is the typical bbg article that highlights a compelling graph and then struggles to connect the dots. Yeah--the local bond market has been suffering as the PBOC tightens both liquidity and lending standards. But these two graphs were trucking along in opposite directions for the entirety of 2014 and 2015. I don’t see much evidence to suggest why that can’t happen again. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="225" src="https://lh3.googleusercontent.com/Q2DZpstSfWy_05wsRKrqIYl2YK6w9DUM8UhfcKDLKH_4A08lzMiukBQHpXH6iwDZ8Ajq7_a2h_TOU25p-96STSosT9fEb0uvWue0Nd2iqKpn4VkAeBaLyJzQ2W2NwMYcBKMWxAeF" style="border: none; transform: rotate(0rad);" width="400" /></span></div>
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<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">A more interesting question might be why base metals are doing so well while there are signs of a slowdown in the Chinese industrial machine. First, on copper--I think supply is a factor there--earlier this month the Chinese government through some sand in the gears of copper scrap importers, which was probably supported front end futures--and second, production continues to struggle for any number of reasons from falling ore grades to higher input costs. </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Yet there is little evidence that global industrial demand at large is waning--with Europe gaining (some) momentum, and the German export powerhouse continuing to steamroll all in its path, maybe the rise in metals isn’t so crazy. I’m still skeptical--I’d fade this (or as we have discussed elsewhere, short CLP) if anything. </span></div>
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<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Turning back to the US--you can always tell when a market narrative is firmly entrenched when small moves cause big headlines. I spent most of Thursday and Friday either chasing my kids around or buried in a spreadsheet--but I read panicky headlines in my news feeds about “VIX up 50% this week.” </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Well, ok...I guess we did come far closer to nuclear annihilation than we have since the days when my favorite pastime was playing baseball against myself in the backyard (back off...I was an only child living in the middle of nowhere). </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="232" src="https://lh3.googleusercontent.com/LmTEK_4WhaAYKaycU5MIpejOiGV8y_KDjC-gMXYcVAkiMFOIA8i-Gpm--nSV8tEnGW-NWaWFrKSFA_MOMyYSDNREM6jIkpmE8m0RkHbw1AmXuA1VoNdcXT86AU3X4dxhfGSr-74M" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="475" /></span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Anyway, wake me up when high yield rolls over and takes out levels from, I dunno, 2016. I agree with LB and others that the lack of a significant selloff in stocks amid a jump in vol shows this is a pretty typical over-positioning/crowded trade/unwind type move. If you had to put a nickel on VIX 20 or VIX 10, which would you choose? I’ll take the under. </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="232" src="https://lh3.googleusercontent.com/Y9_c9M2UZ8FPwEWFnjWXevfZvbq7aOVhqYR1C9qk2zrxeqh14dujXFItKXXKMTJe9Us0DHoN_vdjFWUESdKasVEDm8mAXFGOqUq5qbp2fdIBvh0pV1LcQBK7f4fyBWRvWzzgg9sb" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="475" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">From the stocks are overvalued file...our </span><a href="http://wolfstreet.com/2017/08/12/stock-market-downturn-warning-sign-multiple-contraction/" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">brothers over at Wolf Street </span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">showed this chart--which I think can be summed up as “the growth of earnings has been greatly exaggerated.” I continue to believe that the rich valuations in stocks right now MUST be pricing in faster gdp or earnings growth, despite no compelling growth, fiscal policy or regulatory reason for doing so. And monetary policy? Is the Fed on hold => buy stocks? Not at these levels, Margaret. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="233" src="https://lh4.googleusercontent.com/pNkf_uF05G_6GPCP6xDTw33pYZi2YV-EHxsVC4i2uBAGCWAPChkEI5DsV0v5yZ-rexgNPwcKoopGMPrSNnY9cfW3RQ4vcEpwl09dDOrXHDSa6m12T60MxlO4eVpM1XWHZcCQQeWX" style="border: none; transform: rotate(0rad);" width="400" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">And just for fun, I can’t even remember where I grabbed this chart last week--but if I recall the underlying theme was that the SNB was a driver of higher stock prices earlier this year, especially in tech. Maybe...but am I the only one that noticed that the SNB seems to show up to buy a ton of AAPL shares every New Years???</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="264" src="https://lh5.googleusercontent.com/uWkW4zrm_d_72H_Q5WOLqo08hC4NYqnP40nPL6VZbkGiXn5Qh3NTNN4rgmhJkB4ctxmwQKvYRVCO5Yo8mq8Y1AHOBt7rmPvF8OCKUT284ybdWmTW_Ou76bMA7VJerWZegNyvQxDt" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="416" /></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Oh, and I just have to mention that Trump said military action isn't out of the question in Venezuela. Because....we gotta bomb sumthin'? Because...sumthin' about commies? Because...sumthin' about oil? Can I change my vote to the hippocratic oath? First do no harm...</span><br />
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span>
Shawn<br />
<a href="mailto:TeamMacroMan@gmail.com">TeamMacroMan2@gmail.com</a><br />
<a href="https://twitter.com/EMinflationista" target="_blank">@EMInflationista</a><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhYWK3QiOafBpL4ZeA4lnmxzJ7qBggWR8Z-frMigk0bKwAo3bwgjDnuSPkdty-o6_VQg2R4tZrgUz-vqdUCP3POWuI_XF-8in59clu0MlcjdKZBzShWNjbaJT2ysdPNnifmkdZKcg/s1600/1u1xzi.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="464" data-original-width="608" height="244" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhYWK3QiOafBpL4ZeA4lnmxzJ7qBggWR8Z-frMigk0bKwAo3bwgjDnuSPkdty-o6_VQg2R4tZrgUz-vqdUCP3POWuI_XF-8in59clu0MlcjdKZBzShWNjbaJT2ysdPNnifmkdZKcg/s320/1u1xzi.jpg" width="320" /></a></div>
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EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com2tag:blogger.com,1999:blog-34323687.post-86352824531877289922017-08-10T14:20:00.003+01:002017-08-10T14:20:42.506+01:00Some quick chart pornGiving our regular contributor Shawn a little rest, I thought I would add a few different charts that have caught my eye recently<br />
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1) Dax - French Election Gap Fill - looks like a good risk reward opportunity to me. Max 5% stop loss and can probably even do much less.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg4EoPtOZzkv9_wISV0yKKpMB7p2LVHud_XfcE_IqzcmKq3JgA3gGoJZh26bbgrMLNrOMHt7FSQWP2FslpepjWGk-8dhASePZ6poqZTC9ygp5Egbp43yb43gh2ArFenOKskBMqiOA/s1600/dax+election+gap.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="782" data-original-width="1274" height="392" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg4EoPtOZzkv9_wISV0yKKpMB7p2LVHud_XfcE_IqzcmKq3JgA3gGoJZh26bbgrMLNrOMHt7FSQWP2FslpepjWGk-8dhASePZ6poqZTC9ygp5Egbp43yb43gh2ArFenOKskBMqiOA/s640/dax+election+gap.png" width="640" /></a></div>
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and the longer term chart just for comparison.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgX65qB4ayQoVvRa5gfKlsZ_sqNLY29B5IuvTyM97oHY_okwXN-V4bf8bxtnkhVBR9PKz6OAK3ZV-C0L7Qw6ID6oIfzW5JnAxsVCAdmy5z37hldkaTk3b_4Y6OvSwxFX6gQRG_Cpg/s1600/dax+election+gap2.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="787" data-original-width="1271" height="395" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgX65qB4ayQoVvRa5gfKlsZ_sqNLY29B5IuvTyM97oHY_okwXN-V4bf8bxtnkhVBR9PKz6OAK3ZV-C0L7Qw6ID6oIfzW5JnAxsVCAdmy5z37hldkaTk3b_4Y6OvSwxFX6gQRG_Cpg/s640/dax+election+gap2.png" width="640" /></a></div>
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2) Euro Yields. Testing previous resistance. If you think EU taper is still in the cards and yields will steepen this could be a good time to get in. German 5 and 10 year yields below<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj8uejUsjO6q7ROhhy_yKIMPve5gU7ZDnRlkyJ_nXjOboikNrGZhtQVHNft5s_YbUCgf36KAGl6asef1vXZzagEeyTI4v5brOCVNM2t6_g1pkQL9pa7wyEm8Ez6kO880-jsh29Pow/s1600/german+yields.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="787" data-original-width="1276" height="394" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj8uejUsjO6q7ROhhy_yKIMPve5gU7ZDnRlkyJ_nXjOboikNrGZhtQVHNft5s_YbUCgf36KAGl6asef1vXZzagEeyTI4v5brOCVNM2t6_g1pkQL9pa7wyEm8Ez6kO880-jsh29Pow/s640/german+yields.png" width="640" /></a></div>
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3) Hard Commodity Bull market. Take a look at Copper and Chinese Steel. Pretty impressive. I have been betting they would turn earlier in the year (see china credit growth below) but clearly the underlying fundamentals are strong (for now).<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEghECstDozdho1pU78bG8rz3y1O4l8QqDWM6UB0v0JqtWKPF95-S7_Kyug18UXZb9zMQ5nP2scc2UB2SE960ZJsxuYn0RxzwbjPKFUIsNAxoz48X4haQ9pUanAciJ8vlRvtVlmFYw/s1600/rebar%2526copper.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="698" data-original-width="1266" height="352" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEghECstDozdho1pU78bG8rz3y1O4l8QqDWM6UB0v0JqtWKPF95-S7_Kyug18UXZb9zMQ5nP2scc2UB2SE960ZJsxuYn0RxzwbjPKFUIsNAxoz48X4haQ9pUanAciJ8vlRvtVlmFYw/s640/rebar%2526copper.png" width="640" /></a></div>
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4) Kospi perhaps setting up for a re-test of multi year range. As long as EPS are above prior range I think its a good trade, though estimates will always lag price<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjwDNfvcSDliugx1PsmsCNPu27V-FND-y7010WxlPZ2LZb2b2vbTz3xe3X4Wwcbd9nyDlXNMGBgPxTLcK7iaifQhK_QWW4HVothlk7IGTFD-bNnU0fPKBB0-owd4jm36dHoTtzqiA/s1600/kospi-breakout.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="778" data-original-width="1275" height="390" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjwDNfvcSDliugx1PsmsCNPu27V-FND-y7010WxlPZ2LZb2b2vbTz3xe3X4Wwcbd9nyDlXNMGBgPxTLcK7iaifQhK_QWW4HVothlk7IGTFD-bNnU0fPKBB0-owd4jm36dHoTtzqiA/s640/kospi-breakout.png" width="640" /></a></div>
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5) Last but not least, lets remember that the Chinese economy is a big influence on EM and global demand and unlike the EU or US economies, its still a black box to most. Given that credit is a major driver of the Chinese economy, credit growth argues that you should be cautious on a 12-18M horizon. But for now, party on<br />
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<br />abee crombiehttp://www.blogger.com/profile/13320039155613443039noreply@blogger.com11tag:blogger.com,1999:blog-34323687.post-46428136871656016892017-08-08T03:14:00.001+01:002018-04-14T01:58:16.485+01:00Really, What's to Like About Brazil?<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Last week I posted </span><a href="http://macro-man.blogspot.com/2017/08/some-thoughts-on-brazil-your-keys-to.html" style="text-decoration: none;"><span style="background-color: transparent; color: blue; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">some thoughts on Brazil</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">, which I concluded by mentioning that I am optimistic on the outlook there, without getting too deep into the weeds on what that meant, given the combination of a volatile political situation, a strong rally in asset prices, and fair to strong positive expectations already baked into the market. Frequent contributor Johno rightly posited a few questions--questions I should have dealt with in the initial post. Without further ado: </span></div>
<b id="docs-internal-guid-9a085a72-bf9b-4a46-9d99-c6e847145460" style="font-weight: normal;"><br /></b>
<br />
<ol style="margin-bottom: 0pt; margin-top: 0pt;">
<li dir="ltr" style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; list-style-type: decimal; text-decoration: none; vertical-align: baseline;"><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">I see Meirelles saying a pension bill would generate 75% of savings originally planned while a doubter like CSFB sees 30%. A big spread! Any view where in that range a bill passes? </span></div>
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<b style="font-weight: normal;"><br /></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">I mentioned the pension reform as a potential game-changer. As Johno mentions, the problem is how watered down this thing gets. The initial proposal would have been a good fix, but Temer administration already offered to water it down in May, and that was before he was caught on tape signing off on bribes, and subsequently accused of outright corruption. Looking back in my notes, JP Morgan expected a reform to be passed with 70% of the initial savings...</span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">in April</span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">. So go ahead and fade that number to anywhere between the bearish 30% CSFB figure and, let's say 50%. That said, to the extent the current congress can break this taboo would still be a positive--especially after the election. </span></div>
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<ol start="2" style="margin-bottom: 0pt; margin-top: 0pt;">
<li dir="ltr" style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; list-style-type: decimal; text-decoration: none; vertical-align: baseline;"><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The DI curve sees about 125-130bps of cuts in the next year and then >100bps of hikes the following two years. You alluded to value in (fading) that steepness. Curious how you think about that. A call on prolonged slow growth, or structurally lower inflation and maybe lower real rates?</span></div>
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</ol>
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<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The terminal rate is currently around 7.5%, with some steepness going into the election, and a return to double digit rates as we move into 2019. </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="248" src="https://lh6.googleusercontent.com/ck5p1KS_vVOHja3_rMHrqqHo3zvWK9B7MjbLR753gmo7GKlqjPMj7V_M3TbvgEoxEvDzWD_Wh_C9xR0yqrixCDBJr8ZO2pzojyLxVGFZBBJqMIBYp7mXMxK8ucBH4_unwnyQn0e9" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" title="Chart" width="403" /></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The forward curve shows a couple of interesting points--first is the steepness implying hikes throughout 2018. That aggressive in an election year without a bounce in inflation--while this is possible, I don’t think it is a certainty so long as taxes are going up, fiscal policy is tightening and BRL is strengthening. Certainly the latter could easily change by 2018, but who knows. </span></div>
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<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The second point is the continued steepness to what appears to be a “neutral” level near 11%. If one were to assume a long-term inflation rate of 5%, which is 1% over the center of the central bank’s target mandate, that is a real rate that is still nearly 6%. </span></div>
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<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">I hear you thinking, “hold on there hombre, wasn’t it just last week you were talking about the central bank’s low credibility and lousy inflation targeting credentials?” </span></div>
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<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Yes, that’s true, and certainly warrants a term premium. But you can see in the inflation history that CPI bounced around 6% in an era of unprecedented commodity prices, fiscal profligacy and monetary irresponsibility during the reign of the Lula/Dilma/Tombini axis (<a href="http://www.americasquarterly.org/content/was-it-all-her-fault" target="_blank">read this brilliant article</a> by former MS Latam economist Gray Newman to learn more about this era in Brazilian economic history). With a center-right president, chastened congress, a more orthodox central bank board and governor, tighter fiscal policy, and lower commodity prices, medium term rates of 6% real on 5% breakeven is way too high if you buy into the reform story, which would clear the logjam of red tape and bureaucracy that has held down Brazilian productivity for generations. </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="292" src="https://lh5.googleusercontent.com/-cYMwEXt-MZfJVRpu8x6cc8ctKGNZGVkMw-QsuF61fOQEDXb0g_AuMf5EY3kvnnZvIKiSzYzF1mLRf1FH0KIl_ZAjR73WRBKsb3y4a26_iAkTxElVnAWWIVoAl7HCF8kcXskpaRE" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="377" /></span></div>
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<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">If structural reforms pass, long-term breakevens and real rates will fall. Simple as that. And the Jan19/Jan21 flattener is a great risk reward if the central bank doesn’t cut quite as aggressively as the market thinks right now, but then leaves rates in the basement during 2018 which we can’t rule out quite yet. </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="288" src="https://lh5.googleusercontent.com/IalzdKvcegIosx4xL1LS5XBE4CEJPP6St9Xc43YOR47dyAY2TnrxoNc7fDZKBy3he_uK0qedU1IRr46zjPv9hDCL-0Rz48cZZaFcRjC4YKXkeZF7omJKrWn6YU0EWjcmsJsXxFML" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="480" /></span></div>
<ol start="3" style="margin-bottom: 0pt; margin-top: 0pt;">
<li dir="ltr" style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; list-style-type: decimal; text-decoration: none; vertical-align: baseline;"><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">How worried should we be about Lula? </span></div>
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<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">This is really the fulcrum around which the rest of the </span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">long Brazil </span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">thesis rests. I think Lula has been strong in polling thus far because of a) name recognition, which goes a long way anywhere, but especially in Brazil, and b) he’s still the leftist flagbearer, despite his recent conviction and subsequent prison sentence due to corruption charges. </span></div>
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<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">But I don’t think he is going to win, in fact, he may not even get to the starting blocks. He will have to win an appeal to even run, which may or may not happen before the election. But as Johno mentioned, while he is polling in the high 20s-low 30s, this is a block of people that have supported him for the past thirty years and would continue to support him even if he showed up on TV wearing a sportsuit made of gold and holding a suitcase full of cash. The rejection rate is the key thing for Lula--there is probably a bare majority of the electorate that wouldn’t vote for him under any circumstances. </span></div>
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<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">In the end, it is indeed not unlike Le Pen in France--even if he is eligible to run, he will suck the oxygen out of the leftist movement, despite being unelectable. As such, his candidacy is if anything a positive--and would likely turn up a few buying opportunities along the way, just as we saw in France earlier this year. </span></div>
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<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">What does that mean for the rest of the field of presidential candidates? One “name” is Marina Silva, another leftist but more of the “green” variety. She doesn’t have the political machine or the money to make significant waves nationally. Same goes for other candidates from the left like Ciro Gomes, who will still struggle to get away from the legacy of the PT. </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">On the right, there is Jair Bolsonaro. He has been rising in polls lately but is probably unelectable due to some views that are, erm...let’s just say “old school”. </span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Bolsonaro's rise in popularity illustrates the strengthening hand of Brazil’s conservative movement. </span><span style="font-family: "arial"; font-size: 11pt; white-space: pre-wrap;">This will play into the hands of two center-right candidates from the PSDB, João Doria and Geraldo Alckmin. Unlike Aecio Neves, they have managed to steer clear of the Car Wash scandal, are center-right known quantities and will be cheered by investors, yet don’t have the baggage of a guy like Bolsonaro. Despite the filth of the political system at large, the PSDB money and machine will be of great importance--there just isn’t much breathing room for an insurgent candidate. </span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">If one of those candidates wins in 2018, he will have the mandate to push through stronger reforms and tighter fiscal policy. So while there are certainly landmines in the next 12 months, I don’t see a candidate that is likely to reverse or sandbag the reforms that are necessary to put the country back on a sustainable growth path--in fact it is quite the opposite--there is likely to be a supportive government, a more reform-minded congress, and an orthodox central bank. That is a combination that Brazil hasn’t seen since, well….forever. The market is still trying to wrap its hands around that.</span></div>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: white; color: #222222; font-family: "arial"; font-size: 10.5pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">To sum it up--we could also spend some time drilling into the relative value between Brazil and similar credits, equity valuations, or recent performance of BRL relative to high beta EMFX. At the end of the day Brazilian assets have performed well over the past year, but not dramatically better than the rest of the asset class given the massive tailwind for EM. There is plenty more to go if the politicians can deliver. </span><br />
<span style="background-color: white; color: #222222; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span>
Shawn<br />
<a href="mailto:TeamMacroMan@gmail.com">TeamMacroMan2@gmail.com</a><br />
<a href="https://twitter.com/EMinflationista" target="_blank">@EMInflationista</a></div>
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EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com17tag:blogger.com,1999:blog-34323687.post-84958086667983227362017-08-04T06:09:00.001+01:002018-04-14T01:58:38.956+01:00Some Thoughts on Brazil--Your Keys to the 2017 Macro Alpha Supercar<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">It’s been a long time since we’ve covered any ground in Brazil--but it is great macro territory. Brazil has so much that other markets don’t: </span></div>
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<li dir="ltr" style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; list-style-type: disc; text-decoration: none; vertical-align: baseline;"><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Liquidity--a super tight, regulated futures market for swaps and FX, stocked with a delightful mix of domestic and foreign real money, hedge funds, and rank speculators. </span></div>
</li>
<li dir="ltr" style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; list-style-type: disc; text-decoration: none; vertical-align: baseline;"><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Carry--where else do we still talk about double digit interest rates?</span></div>
</li>
<li dir="ltr" style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; list-style-type: disc; text-decoration: none; vertical-align: baseline;"><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Stories--there’s no limit to the narrative you can build around a trade idea in Brazil. </span></div>
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<li dir="ltr" style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; list-style-type: disc; text-decoration: none; vertical-align: baseline;"><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Idiosyncratic, uncorrelated prices. Low correlation = alpha. </span></div>
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</ul>
<b id="docs-internal-guid-d6da27d2-aba3-b7b6-f377-e28d98c0da4f" style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">What’s not to like? For starters, when the top management of one of the country’s biggest banks gets </span><a href="https://www.ft.com/content/f8622ee3-92cd-3efc-a6a1-4d3c086a544f" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">hauled off to prison for corruption</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">, and it is the same bank, if I recall, that paid rates in massive size ahead of a surprise central bank hike because one of the executives had a “dream” they would hike….well, you have to be pretty careful who you are trading against. </span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">All that being said, Brazil has grabbed EM headlines this year as the “Car Wash” scandal drags on. Back in May, President Temer was implicated in a bribery/hush money scheme earlier this year, local markets gapped lower on the assumption that Temer would be impeached or crippled for the remainder of his term. If that were to happen, important structural and fiscal reforms would fall by the wayside, and the country would continue to stagnate and run up huge amounts of debt. </span></div>
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<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Amazingly, despite Temer’s complete lack of scruples and the moral compass of a wolverine, he has persevered, winning a vote earlier this week </span><a href="https://www.ft.com/content/70deba6a-7785-11e7-90c0-90a9d1bc9691" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">to avoid being put on trial</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> by the Supreme Court. Temer was also able to jam through </span><a href="https://www.bloomberg.com/news/articles/2017-07-11/brazil-labor-reform-approved-in-spite-of-rising-political-crisis" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">an important labor reform bill</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">. That has increased the market’s optimism about the passage of the big one--a pension reform bill that would plug a gaping hole in Brazil’s off balance sheet liabilities. </span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">In the past I’ve alluded to the EM metaphor that “energy reform only gets done in the dark”--well, in Brazil the lights went out last year. The country is in the third year of a depression...domestic demand has cratered...Rio is broke….crime is out of control...and pension costs are bankrupting the government. Even the crooked politicians know they have to act. </span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">But will they? That is literally the million dollar question. I tend to think Temer has some cards to play this year, despite a popularity rating of 5% </span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">(fill in your own “he’s less popular than” joke here)</span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">. This is what makes Brazil idiosyncratic, and a great way to generate alpha….or lose money. I’m positive on the story--valuations aren’t particularly attractive here but if you believe the structural story will improve, there is still good money to be made here. </span></div>
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<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">With that, lets go to the charts. </span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Indigestion from years of misallocated capital (to put it delicately), corruption scandals and the end of the commodity super-cycle have rabbit-punched growth for the past three years. </span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="257" src="https://lh3.googleusercontent.com/QkkFr3-AhUY_BGQxuqXcCCEIctNmQE87OAM6qGj9dOfb888wDDctNxG_wR7wc7aWT_gDbSmMFJvEZFirLN9-FtJIFIW4Dg9E_HBac21bQlzykJbDssvXeFg3VemD5bWV-BbIGApQ" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="374" /></span></div>
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<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Yet the trend for growth is higher...domestic demand is recovering, and FDI never went away. As export growth has returned the flow picture has perked up quite nicely. A balanced current account and 3% FDI/GDP shows continued confidence in the country from abroad.</span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="240" src="https://lh3.googleusercontent.com/agrWVICqPXa0xED_3BpemWrJb6hRCQ-DjSvlr9dpQ7FRIeZlaE1GpaunC96V2hJE3IbHvxOGCN2wNvTJ_dh8l0FSDBsHj1elOhZ9cK7zv__WGYRA-JAYUQ97UOH9S1GycqiKzMaa" style="border: none; transform: rotate(0rad);" width="400" /></span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Most foreigners, at least in the real money “community”, express views in Brazil via external debt. This chart is a group of 5y CDS spreads on similar credits--with only Indonesia on the RHS. You can see here there is still some space between Brazil and Turkey and South Africa after the gap wider in May. Much better credit dynamics in those countries, but again--if you buy into the Brazil reform story, there is still some juice there. </span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="232" src="https://lh4.googleusercontent.com/OZ23OhskSaJIxWIKPD0v-p4f4-Elgg0HCT90Z6dYPyPFzTjWftOOaDw7bd4upG5OMHTZPUcztBfvfHMmeZB53w261neEY5g_bhacooSpAleHvBWbiAjRHAcP5Ptfs5yCEhOEJ7Na" style="border: none; transform: rotate(0rad);" width="475" /></span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Indeed, the debt situation has gotten ugly fast...total net debt unwound ten years of progress in less than two. Keep in mind in 2002 there were fears that Brazil would be forced to default or restructure their debt! </span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="240" src="https://lh3.googleusercontent.com/Grk6usB4iNQi92Qf4Gwfn3jF6ncC0wL0NfhvYPue4UUKvP5pmI_8JR11Wxx1jsu1NviFBUniLeO8pZrVAU-zRv2P6vla0nHJkegNr2Gm25AuQYTiyJOgrhj_yMS_d66o2dkLhx8W" style="border: none; transform: rotate(0rad);" width="400" /></span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Another positive for the credit is that despite this huge acceleration in net debt, it has all been in local currency. Gross external debt/GDP hasn’t moved in three years. So a big deval in the currency doesn’t have the multiplier effect of making the debt more expensive to pay back. </span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="240" src="https://lh4.googleusercontent.com/5vXvX1PwjMExqWGZIQr4BPogNmpd6XJqmBqhT1WYG09AVJgsanwZp06fIp90kAWDa3adTLoODvk2ghTQUHVBv23iCxTTzjSjslRYM3SvDgJTwIqJPnjAg3U8v2BuJUEt-DyflfYL" style="border: none; transform: rotate(0rad);" width="400" /></span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">A related point is that local markets really haven’t outperformed all that much over the past year, when markets had recovered from the depths of hell brought on by the depression and impeachment of President Rousseff. This chart shows equity markets have done well, but roughly in line with global markets--only with a heckuva lot more vol. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="232" src="https://lh6.googleusercontent.com/nYeDyeYghhwJ6oyQhG-vWCeB4jnyNk7Us-vOcdZ0EpXm9aq4r8uEJbDcYRP_PbnlfloMGRPfLNyVeo0ROk5qVaFBK3ApfYTEI5XkpXgiUpEP3auUwupFxUAoHrIsaoZkxxyFVNXj" style="border: none; transform: rotate(0rad);" width="475" /></span></div>
<b style="font-weight: normal;"><br /></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Looking to FX, BRL is in the middle of the pack for 1-year performance. Behind RUB, roughly in line with MXN, ZAR and COP (although WAY ahead of those currencies in total return, after you add in BRL’s tasty carry), and ahead of TRY and ARS. Again, good performance, but not disjointed from the EMFX rally theme of the past year. </span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="183" src="https://lh4.googleusercontent.com/4UB1LLexmCA-cN_Lf6vXsJrZRXCV_Cggiw5oTYK9nxRXXo1xbdyY0SjxiszSoOCd_48_len7TtbGMMQ3uGLb-LJ_1n44QnMtWzHuqVeSh9SvODYg-IHFWD4CtxWg6j02za5OpzaT" style="border: none; transform: rotate(0rad);" width="400" /></span></div>
<b style="font-weight: normal;"><br /><br /></b><br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">We had a little back and forth on inflation--the central bank’s target is 4.5% +/-1.5% (although it will </span><a href="http://www.reuters.com/article/us-brazil-cenbank-inflation-idUSKBN19K1X1" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">purportedly be lower next year</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">). If you draw lines through 3% and 6% on the chart below, you’ll see the dark blue line (IPCA = CPI) hasn’t spent much time in that interval since 2012, when a central banker by the name of Alexandre Tombini took over and slashed rates from 12.5% to 7.5%, despite no evidence of a structural decrease in inflation. </span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The government and it’s state-run banks took this cheap money as a green light to open the credit floodgates….a phenomenon which probably isn’t too far disconnected from the massive, endemic government/corporate corruption that metastasized throughout the economy during that time. </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="292" src="https://lh5.googleusercontent.com/-OWKD3vyaJ0ddLVjrafpvuv-Ie_DfBUktyZpADA_2Z6kXeZP2TasEn8rR2BCMhA1zj1gfwc4RZXRkF0WtHawxMZ_nQmVZJYAjRcnIj40KVZOmVxmSQgvroSJlhgovsCxGtAb18_S" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="377" /></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">So yeah--</span><a href="https://www.ft.com/content/ecf3c0c0-632e-11e7-91a7-502f7ee26895" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">while inflation has hit 3%</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">, I don’t think this is the Volker trade. You can see in this chart that regulated prices have played a big role in sandbagging already high headline inflation in the past, and moderating it over the past two years. As the reform movement progresses there could be more hikes in regulated prices as subsidies get unwound--but on the other hand, a more competitive economy and stronger BRL would help keep the lid on inflation. Regardless...less vol in inflation, and thus overnight rates, would be massively supportive of asset prices. If a center-right reformist wins the presidency next year, that is a big possibility--similar to the renaissance in Argentina over the past year and a half since the Macri victory. </span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Indeed, the lower inflation figures and positive momentum on the politics has given the central bank the space to cut rates aggressively. This has led to a big rally in interest rates. The chart below is the pre-cdi Jan21, essentially Brazil’s version of a eurodollar contract. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="318" src="https://lh6.googleusercontent.com/pfKe7tyImr9ZxT45G6ujMzhxrNVvfNN8eY2cHhhefY8a0Jr0qNU02pzURcHcrZzY3FNz0GnuasWPt41hOZwT67H_-djWmJi0mbeVat0h6Wzv0UJzt_vULO49MnTPFT5NCgiVt5F3" style="border: none; transform: rotate(0rad);" width="640" /></span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">I know, a 9-handle!! I can’t believe it either. </span></div>
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<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Similar picture in the benchmark Jan25 contact--I think there could be some value in the steepness here if we get more progress on reforms and Lula fades to black. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="252" src="https://lh3.googleusercontent.com/484YURow48ZSQbNYRUmHMIzP_2_MxiScQQhZug4mPrPCPAhwHa5ZtHrxaKR74fv90EBRsE-uxA6_taltK1pxJbUH6Jy4k02zgsel25Qvzqm22JYL3-8MPKps40f7DdVHehB4LKV9" style="border: none; transform: rotate(0rad);" width="640" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Putting it all together--I think there is still value in Brazil--I’ve been positive on rates there most of the year, but it is getting tenuous here with a 7.75% terminal rate by the end of the year. I’ll need more evidence of structural reform progress to buy into that--but as I mentioned I still see value in duration and real rates at these levels. </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">BRL...I don’t think we’re done--lay off some risk against the EMFX dog of your choice if it helps you sleep at night. </span></div>
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<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Credit--I think the first couple of charts are persuasive--while debt dynamics are still negative, and the country is likely to run a primary deficit for the third year in a row, significant reforms would fix problems other countries still have, and you have some margin for error relative to countries with problems of their own. </span></div>
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<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">It all comes back to reforms. Do you buy into the story? Reforms get done, economy perks up, a centrist wins the election….Brazil is off to the races. But….Temer weighs on the reform movement like a concrete anchor, the economy stagnates, Lula wins the presidency….then we start back at square one. </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">I continue to be optimistic--but it is an alpha game--there will be a winner and a loser. </span><br />
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span>
Shawn<br />
<a href="mailto:TeamMacroMan@gmail.com">TeamMacroMan2@gmail.com</a><br />
<a href="https://twitter.com/EMinflationista" target="_blank">@EMInflationista</a><br />
<br /></div>
EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com8tag:blogger.com,1999:blog-34323687.post-69941056875489323722017-07-31T20:46:00.001+01:002018-04-14T01:59:03.767+01:00Venezuela, Chaos, and Oil Prices<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: large; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="394" src="https://lh3.googleusercontent.com/Ul8UyQuUc9vpXqgMz5b8nanGwfc14SFtQ3c35FTqN-hB4fpRVlqtVQeWwdeQKWSvGCfL67dMtC5G5F-5U1RbdKVN44nbNw0NFuYxjCzVM-0QCC5tXUIvUf7GOeU7wfhEcn-wRcht" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="299" /></span></div>
<span style="font-size: large;"><b id="docs-internal-guid-5733041e-9a2f-8a1e-be8c-dcdba5cd5d46" style="font-weight: normal;"><br /></b>
</span><br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: large; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Usually I get a warm feeling when Latin America makes the cover of the Economist, like when the national news talks about your hometown. I know I won’t learn much but it is always fascinating to see how the media portrays your backyard. Mexico had a feature there back in 2012, which marked a nice top in MXN, right before growth ground to a halt and oil production took another leg lower. Argentina was there way back in the day during their financial crisis early in the century--although one had to wait for the restructuring in 2004 before there was light at the end of the tunnel. </span></div>
<span style="font-size: large;"><b style="font-weight: normal;"><br /></b>
</span><br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">And of course there is Brazil, which graced the cover three times> Few covers can match this one as the famous “Economist Contrary Indicator”: </span><a href="http://www.economist.com/printedition/2016-01-02" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">January 2, 2016: “Brazil and the Disastrous Year Ahead”</span></a></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: large; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="375" src="https://lh5.googleusercontent.com/RrOSXSFFgss-F-PhZDWXg4LhloqbBXrLi8vWoB3E6NEe7d_2jebjfVrOc880qkwfjWmaCil4TtXnxu4XU58BeKOlQth9uuYeU-w1rTrC_sWzgNohnTpAxXpeuE94JEVPrwV71Cjj" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="285" /></span></div>
<span style="font-size: large;"><b style="font-weight: normal;"><br /></b>
</span><br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: large; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Go ahead and look at a chart of EWZ. I’ll wait. </span></div>
<span style="font-size: large;"><b style="font-weight: normal;"><br /></b>
</span><br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: large; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Ok, I can’t help myself. Here it is. </span></div>
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</span><br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="233" src="https://lh5.googleusercontent.com/ABJ7YoL5TMoJyZRIfgimHOWxfACgMFs1LLZEamsqoyjSrpuirThI9OkT3RaWU3Jjz81Tq6xfEX_kVpDZzfJ-AgDls1RyJUDOWmzz8sJqlLjfkIy2kQNDE3ydZqiAnXVL3Afznt47" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> </span></span></div>
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</span><br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: large; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Epic. </span></div>
<span style="font-size: large;"><b style="font-weight: normal;"><br /></b>
</span><br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">So it is not without trepidation that I read </span><a href="http://www.economist.com/news/briefing/21725558-unpopular-regimes-attempt-impose-dictatorship-could-end-bloodily-nicol-s-maduro-tries" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">this week’s cover story</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> highlighting the humanitarian disaster in Venezuela, and yesterday’s vote for a constituent assembly that aims to rewrite the constitution and officially bury one of Latin America’s oldest democracies. </span></span></div>
<span style="font-size: large;"><b style="font-weight: normal;"><br /></b>
</span><br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: large; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">After spending many years covering the region, this is the first story that genuinely makes me sad. Economies rise, economies fall--people get good jobs and advance, people get fired and suffer--this is basic material of capitalism. </span></div>
<span style="font-size: large;"><b style="font-weight: normal;"><br /></b>
</span><br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: large; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">What is going on in Venezuela is so far from capitalism, it boggles the imagination. In addition to violent tactics to repress opposition protests, the government has implemented a policy to continue to service the country’s external debt at all costs. This means dollars that could be used to import food and medical supplies are being diverted to pay back loans and service bonds. Exports have fallen 70% from “non-peak” levels. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: large; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="371" src="https://lh4.googleusercontent.com/iLsKaC2UYI3UJmoqmpT-MwUY758bRx99u13_ulq5hp56Ur0K8-X3KA0n6YSAPRAuZ8Z3Z-jZsDMOdMV1zTBGih7eXJGxNs7_N645mao-JNXGZkBhHSyF_hr1U-6Qz6B-t3BVbwZG" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="600" /></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: large; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">An often quoted statistic is from a survey carried out by a group of universities earlier this year--they found 90% of people are living in conditions of poverty and can’t buy enough food, and 75% of people have lost significant weight in the last year. </span></div>
<span style="font-size: large;"><b style="font-weight: normal;"><br /></b>
</span><br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: large; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Give that a minute to sink in. </span></div>
<span style="font-size: large;"><b style="font-weight: normal;"><br /></b>
</span><br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: large; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">This isn’t a backwater--it is a country of 31 million people that only ten years ago counted itself among the top of the heap in emerging markets. But reliance on oil revenues, socialist spending policies and corruption frittered this fortune away. </span></div>
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</span><br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">What does a policy to prioritize debt service over food and medicine imports mean for investors? </span><a href="https://www.caracaschronicles.com/2017/05/25/vennymorality/" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">I wrote an article on that subject</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> a few months ago, right before </span><a href="https://www.bloomberg.com/news/articles/2017-05-31/goldman-sachs-gave-big-hand-to-venezuela-hunger-bonds-movement" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Goldman Sachs took down $3 billion worth of bonds</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> from the central bank for roughly 31 cents on the dollar. </span></span></div>
<span style="font-size: large;"><b style="font-weight: normal;"><br /></b>
</span><br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: large; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">As an owner of front-end debt you cash in on Maduro’s most damaging decisions. One of those decisions is whether or not the state-owned oil company will pay back their next bond, which matures in November. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: large; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="279" src="https://lh5.googleusercontent.com/C_WWxXXkHQYad0_ZhS-AVRwsipYYd65HLgXDtt1N-2gRLkzYGcDxWdbB9qcDmsUHbOtF39eWxUtZ4nyW3fi2ErLtpBhG49eN5dTXwIaklGMb3o1JPaRGiBjvk7JqkYkNZogNKz4b" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></div>
<span style="font-size: large;"><b style="font-weight: normal;"><br /></b>
</span><br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: large; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The performance of this bond historically correlated nicely with WTI, but this year that correlation broke down when it became clear that Maduro would do practically anything to stay in power--and keeping current on the debt is the cornerstone of that castle. Earlier this year, at a time when oil prices were modestly falling back into the 40s, the Nov17s moved from 75 to 90. </span></div>
<span style="font-size: large;"><b style="font-weight: normal;"><br /></b>
</span><br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The “Pay at All Costs” Trade has unravelled over the past month--violence has gotten worse, the Trump Administration announced more sanctions, and yesterday’s </span><span style="background-color: white; color: #222222; font-family: "arial"; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Constituyente </span><span style="background-color: white; color: #222222; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">election was a bloody disaster for the government. </span></span></div>
<span style="font-size: large;"><b style="font-weight: normal;"><br /></b>
</span><br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: large; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Similarly, in the chart below, despite the destitute nature of the bonds, you can see there was a premium for the Venny 20s over the 34s, which indicates some probability that the government would find a way to muddle through and pay back this bond too. That premium has vaporized.</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: large; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="287" src="https://lh4.googleusercontent.com/VrCS5PQmMBca1WeOaBbjAOQBLDBhgTFYYt_xA74dbyr3AqgSwaHziGjjFW_SD2dkoTLvZt3lCHV-E9spPRF_aaYcn2OnmvKgX5H2qvJrQGtDiQrpjYgPaN7iDaPvmC36BqWrdvkh" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></div>
<span style="font-size: large;"><b style="font-weight: normal;"><br /></b>
</span><br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: large; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Yet you can see in both charts that there is plenty of air between current prices and recovery value--most of these bonds traded in the 30s back in early 2016 when oil prices appeared to be going to zero. </span></div>
<span style="font-size: large;"><b style="font-weight: normal;"><br /></b>
</span><br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: large; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Amazingly, the current price of the Nov17s implies roughly a 58% probability the bond will be paid back at par. While that is down from 80% in early June, it is a testament to the power of the gun--the guy that wants to pay back the bonds at par is the one that controls the military. </span></div>
<span style="font-size: large;"><b style="font-weight: normal;"><br /></b>
</span><br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Where does that leave us as investors? As I mentioned in my article, and </span><a href="https://www.caracaschronicles.com/2017/07/31/constituyente-bloodbath-for-vennys/" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">today’s update on Caracas Chronicles</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> by Daniel Urdaneta discusses, there are serious moral reasons why investors should hesitate to lend more money to the government, and many reasons to doubt how much longer Maduro can keep up this deadly charade. </span></span></div>
<span style="font-size: large;"><b style="font-weight: normal;"><br /></b>
</span><br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: large; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">My take is that as an investor this market is a complete, opaque, mess. The people that will know what’s going to happen politically are the same ones trading the bonds--and well...today they are whacking any bid they can find. I wouldn’t be caught dead owning the Pdvsa17s at a 43% default probability. And I’m not sure I could look at myself in the mirror if I made a buck off it anyway. </span></div>
<span style="font-size: large;"><b style="font-weight: normal;"><br /></b>
</span><br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">As much as I would like to say this Economist cover is yet another Latin Contrary Indicator, I think bond prices are bound to fall further. There will be many more investors looking to hit the exits and there are still further risks that, incredibly, the situation gets worse before it gets better. With long end bonds still skulking around 40, and recovery values still too high given the complete </span><a href="https://www.youtube.com/watch?v=jJP31ZiUgeM" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">clustercuss</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> this restructuring will be, I see nothing but pain here. </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: large; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="355" src="https://lh6.googleusercontent.com/h4CNZVsFAukPYfcYOVmGfCpcC0tuaXkqcJkp-hiPZNxYQockC31S8zGihJIstFaIST-x2SI_5g6VpDDjfOSm5R_PXOwyNE5L15aZkHMlqFK-oI3GP-3rAbUGVs4a_mN0knZPdUMN" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="250" /></span></div>
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</span><br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: large; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Not sure where the macro set’s philosophy stands on trafficking in this kind of stuff--do moral implications have any role in investing, or does fiduciary responsibility trump all? Feel free to chip in your two cents in the comment section. </span></div>
<span style="font-size: large;"><b style="font-weight: normal;"><br /></b>
</span><br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Moving on...the implications for oil prices are more interesting. One could be forgiven for thinking oil has been trading in a boring range for the last year, even if </span><a href="https://www.reuters.com/article/us-global-oil-idUSKBN1AG014" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">OPEC might be making progress on slowing the taps down. </span></a></span></div>
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<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="438" src="https://lh3.googleusercontent.com/grl_qcPqZ3VekGTPS0PmR2t49ZM2ndvZt0LXbEVgDBbm0e2OMWxCpqMiXkLUeYUlaotua_cw8TMm6H6PY-bnIDf0Th72TISIA0DJTK0NTceZ-Sc6CdyEpFlJDMc9_x0F8ZKVo5Jp" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="518" /></span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> </span></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Despite all of the problems in Venezuela, production has been relatively stable around 2mm barrels per day, ranking them right up there with the big boys in OPEC. </span><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="312" src="https://lh6.googleusercontent.com/oY4OuhRRKfIH2boDD0dfo7oAcC4tLFf14OuPcvyfmyHqQEsMk_iyzaQxynmqcQ6VALRtJaEsGhOt6xDEvUg_TJcXsYW9DAmTklZmLuP5ptwQmRn60WRSLsCAyCZKT8UaIJwarlVp" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></span></div>
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</span><br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: large; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Perhaps the market is finally coming around to this idea, but those barrels are in serious jeopardy, especially after Trump opened Pandora’s box on implementing sanctions against PdVSA by restricting or banning US dollar transactions. That would likely cause a total destruction of a significant part of the oil supply chain. </span></div>
<span style="font-size: large;"><b style="font-weight: normal;"><br /></b>
</span><br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-size: large;"><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">There is also the possibility that Venezuela </span><a href="https://www.washingtonpost.com/news/democracy-post/wp/2017/07/24/is-venezuela-on-the-verge-of-civil-war/?utm_term=.ec27d660fc7e" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">descends into complete anarchy with widespread fighting</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">. Beyond the humanitarian toll, oil installations would be a ripe target. </span></span></div>
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</span><br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: large; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">You can see in the chart above what an additional 400,000 barrels per day did to oil prices in June--either of these factors could cause an even bigger swing the other way in the weeks ahead.</span></div>
<span style="font-size: large;"><b style="font-weight: normal;"><br /></b>
</span><br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: large; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">I don’t think the supply response from US producers will be as quick this time as WTI peaks above 50---I’m looking for continued strength in oil prices in the weeks ahead, with Venezuela adding a combustible mix of upside optionality. </span><br />
<span style="font-size: large;"><br /></span>
<span style="font-size: large;">Shawn</span><br />
<a href="mailto:TeamMacroMan@gmail.com"><span style="font-size: large;">TeamMacroMan2@gmail.com</span></a><br />
<a href="https://twitter.com/EMinflationista" target="_blank"><span style="font-size: large;">@EMInflationista</span></a></div>
EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com30tag:blogger.com,1999:blog-34323687.post-90530243994710817732017-07-28T16:06:00.001+01:002018-04-14T01:59:16.618+01:00Asia FX, Waking Up from Summer Doldrums<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">It’s been one of those kind of weeks. Whistling along through earnings season...analysts trying to look busy when their bosses walk by, and vainly trying to write something intelligent about the last company conference call when the CEO said only sentences containing words like </span><a href="https://ig.ft.com/sites/guffipedia/right-culture/" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">“right-culture”</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">, “</span><a href="https://ig.ft.com/sites/guffipedia/game-change/" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">game-change</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">”, or, </span><a href="https://ig.ft.com/sites/guffipedia/leverage/" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">“leverage”</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> (as a verb). </span></div>
<b id="docs-internal-guid-82c0e600-89b9-55dd-40a7-e42107be6704" style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Or maybe some war crime against the English language, like this: </span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<a href="https://ig.ft.com/sites/guffipedia/wheelhouse/" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;"> "As brands build out a world footprint, they look for the no-holds-barred global POV that's always been part of our wheelhouse."</span></a></div>
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<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Easy there, Tex. It’s like a consultant had his nickel batteries replaced with lithium. You can bill the client for the hours with only one or two of these words, no need to overdo it. </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The FOMC comes and goes, markets go back to sleep, and then someone comes back from lunch and punches tech in the gut. </span><a href="https://twitter.com/elerianm/status/890308510809862144" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Even Mohamed says BTFD</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">. </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">I’m just going to keep my head down and keep doin’ what I’m doin’. </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">With that let's turn our attention to Asia. KRW has made a move stronger, in line with USD weakness and resilient demand in China, despite imminent fears about slowing credit growth later this year. But JPY hasn’t done much at all, owing to expectations that the BoJ is all too happy to just read the Cliff's Notes of the new #1 book in global monetary policy, “Hawkish Rhetoric for Dummies.” </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="272" src="https://lh4.googleusercontent.com/_3iDZkh48t_zjx5NIh8xJLlr_ALGiU2ZLfQib5q5px9HvxvHclrHFT-QYGVUlBD6zM_94ndf5E_Cd7bGIGboJST7r7WcRYyscW1Ypaf2tvHoeJvszNtRtGhtMuokyF5olK-5jEy9" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">That move from 1160 to 1120 is no joke...there might be an opening for a long USD/KRW position, one that is easy to get away from on a break of the recent range below 1100. IP disappointed again yesterday, and isn’t showing the positive trend for the global growth theme: </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="236" src="https://lh4.googleusercontent.com/DPmDX0wOB8qzl8d_-MfsXxILFMFRhfN5zehBF1iEsDhS7BtjjYAHKQIc4M0oRwG-Y4erV-9EJTOBSr95Ny7kxm3ZoNGGZACWKK9b_r4XP--GS_5PJ3fMl9Dq5FGyphnm9tkvJ7tX" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="327" /></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Yet some of that drag is the result of a dispute with China, which has hit auto exports hard: </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="236" src="https://lh4.googleusercontent.com/ErvmmjDMCSn7O2ig7D9kgXOI7e81XDB6I9RqfDFOYqfPk62fuIAxQE9U9H3MGN0d8dGAiOtfbP6GrYuQ8Ydg7fEzEUFNh1r0vcNyfHVGL7PZBQYlUstIEhaPkIm782v7MGgnuPGj" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="326" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Yet overall, growth has checked up nicely from the slowdown in 2015-2016. Inflation is a bit tougher to gauge here--headline has bounced off the lows but core remains well below 2%.</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="236" src="https://lh6.googleusercontent.com/WdscBg_uNVZzOxJ8M17qe-vcc5JFHLjRZj31H-xBZh7aWN_Mw0YF5qaz78insN0ZZwLnl1RUVx46jd1otmnP5y06sxk0OafsnY9qz4EJkLJYfTvARO5ddJ2AxgQwjnjrd0fIFts0" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="325" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">This chart argues the BoK might start to hike later this year if headline CPI remains at or above 2%.</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="233" src="https://lh4.googleusercontent.com/JE8IgBa9Wd4OijhG8eLbn35MVLpyoXN0hvKAdfuwpjSgNAmoQIC8a4C-3WM-uHIzyO88f6qATpHrPdlEcwaJRstowEH1HhvIVThbbAjVRZVj3KrgUwRyLqMpE2bRo8qlwjXuAxxw" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="320" /></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">But I expect we’ll have to see core converge for that to happen, and that seems unlikely with continued strength in KRW, and little else beyond a mild fiscal stimulus program to push domestic demand. </span></div>
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<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Moreover, on KRW valuation, it is getting rich vs. JPY, a key competitor in exports (and come to think of it, practically everything). REER is nearing the highs from earlier this year: </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="272" src="https://lh4.googleusercontent.com/Tzrj6l8ZYESmc1TEhf3OMu09ov5sRga6mr9ROx0O6dONzHYKbGB9NXLHUv_z0FICNKx1z7NusL21wBWZyJrvlD9VMxHikARkJHM7vZYYsmwMhdAsoYeHMcL9D2GFMYLLTHtEH_Hj" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">A mean reversion trade would be consistent with a bounce off of 10 in the krw/jpy cross. Tough for me to believe we are again in the JPY weakness trend that took this cross to 9 in 2015 before the BoK finally started to act. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="299" src="https://lh3.googleusercontent.com/xrQvOUj4LxtELmL6s0_bWvoL60tkixJtJJJTrsD-ys8wu4oqb8L7ok7VFOU29o3DEU4waCG8HrLWinQL_wce_SvD33f8fqfxQ30r2RsObh76pc3DFNVzZp1DxmZ8I4sfXFAJxdXM" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Yet back in the US we see Trump-care a crash into the rocks, and over a cliff, back into the rocks again, before finally exploding in a fireball...sad! And Trump’s new communications director doesn’t even have the common sense to talk off the record before going on </span><a href="http://www.newyorker.com/news/ryan-lizza/anthony-scaramucci-called-me-to-unload-about-white-house-leakers-reince-priebus-and-steve-bannon" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">a curse-crazy rant to a New Yorker journalist</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">. </span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">What does that have to do with KRW? The market has gotten very complacent about (among other things) trade policy, or more broadly, Trump’s </span><a href="http://thehill.com/policy/defense/344290-mattis-appalled-by-trump-tweets-announcing-transgender-military-ban-report" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">propensity for craziness</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">, ineptitude, or some combination of all three. Should China trade, the trade deficit, or even NAFTA become a big issue again, KRW will be in the crosshairs, just like it was late last year. </span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">That got me thinking about the long TWD idea in the comment section earlier this week--I like the theme of expressing an upswing in the tech cycle later this week via Asia FX, but at these levels I would like some protection against the unexpected:</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="312" src="https://lh3.googleusercontent.com/ZJgwYsF06Mvf6btIX8qluGOmHOlaf-xp3Do61kA09gW2LgKbI5KFmz7SlA7c1SDqZMdNb3xeGAb1i9WQcdcnRYv_z3VaLsV9gOsUbiQJpEwiM0zNGRt_M8TYjMPMtKkSffvrJlqk" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Sure, Korea’s monstrous current account surplus still needs to get recycled somehow...but history shows KRW is prone to get whacked much harder than TWD if rates go higher, USD strengthens, FTQ returns, or China rolls over….it carries flat, and as I mentioned, is setting up nicely to take the other side. </span></div>
<b style="font-weight: normal;"><br /></b>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Adding a short KRW position to long positions in TWD or elsewhere in the region looks like a good beta-weighted overlay...the correlations are high but that could be a positive, foreshadowing a spell of underperformance given the technicals and the rich valuation of KRW on a REER basis and vs. JPY. A USD call/KRW put would lay off enough squirrelly risk to enable much larger core positioning. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="232" src="https://lh4.googleusercontent.com/P2z-ShvBSluZ-X2xOGoMNDpn65pYbzt728QMZ_JYuyb3MUf4xc1FwtTv4JI0dMnutXXSlKaEY-770Vfvu_WliBQNjQIWUGXK4XrUvTUHtYinsCG_YrPoF0Z799wXV9vngXgaikdv" style="border: none; transform: rotate(0rad);" width="475" /></span><br />
<span style="background-color: transparent; color: black; font-family: "arial"; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span>
Shawn<br />
<a href="mailto:TeamMacroMan@gmail.com">TeamMacroMan2@gmail.com</a><br />
<a href="https://twitter.com/EMinflationista" target="_blank">@EMInflationista</a></div>
<br />EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com7tag:blogger.com,1999:blog-34323687.post-27276108169075808302017-07-24T05:33:00.001+01:002018-04-14T01:59:32.605+01:00The Economist on the Chinese Economy: I Wish I Was Taller<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="281" src="https://lh3.googleusercontent.com/M3X33a6QaSyUPPFobuWEm0QIDBeBPUyQddK0WLSF6M4FzdsGY2Kap3K3s4yrFHtvi_0FSCWzxb9L3IesuDDRHPoaX3bYGAWn5Os4FJma7E85xGViDYl5e2vwuxnJ9JWw05DH0h__" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="375" /></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<b id="docs-internal-guid-eb45a839-72de-ffa6-7022-73924dff75fa" style="font-weight: normal;"><br /></b></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">I've been told the whole world grinds to a halt to watch the new season of Game of Thrones, but I've never given one thin dime to HBO so I've never watched it. I still think one of the best shows of all time is Seinfeld. One of my favorite episodes was "The Cartoon." Elaine gets a cartoon published in the New Yorker. Elaine says the pig says, “I wish I was taller.” She comes to realize that she subliminally plagiarized the caption from Ziggy. </span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<b style="font-weight: normal;"><br /></b></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">I’m sure it was the same phenomenon when The Economist published this article on </span><a href="https://www.economist.com/news/china/21725336-its-wrong-assume-reining-it-will-slow-down-economy-credit-growth-china" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">the credit boom in China</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">. The author discusses the BIS research on the history of credit booms, the speed of credit growth, and the gap between credit growth and trend growth, with a wider “gap” tending to expose an economy to greater risk of a crisis. Where have I read that before? Ah, </span><a href="http://macro-man.blogspot.com/2017/06/china-risk-credit-booms-and-hedges.html" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">on MacroMan</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">!!</span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<b style="font-weight: normal;"><br /></b></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Look, I’m sure I’m not the only one that nerds out to </span><a href="http://libertystreeteconomics.newyorkfed.org/" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">“Liberty Street Economics”</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> and the BIS. What I love about The Economist version is, well, how </span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">awesome</span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> it is. They don’t caption their articles, but this guy is an absolute professional. Check this out: </span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<b style="font-weight: normal;"><br /></b></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">“</span><span style="background-color: white; color: #121212; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">On a rollercoaster, riders climb upwards slowly, their suspense building, then plunge downwards quickly, their stomachs lagging a little behind. In its deleveraging efforts, China’s government hopes to do the opposite. It has allowed the country’s liabilities to mount quickly. Now it wants them to plateau or drop gently (relative to the size of China’s economy), leaving stomachs unchurned.”</span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<b style="font-weight: normal;"><br /></b></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: white; color: #121212; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Dang. I wish I could write like that. The article goes on to say that growth and inflation have closed a material portion of this gap in 2017, which is a valid point. But it is still well above levels that the BIS would suggest imply economic stability. </span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<b style="font-weight: normal;"><br /></b></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: white; color: #121212; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Top shelf financial writing aside, this did force me to look back on my analysis from six weeks ago. As so often happens, the analysis stands the test of time, but the trades are a little shopworn. I did pitch them as hedges for a larger risk-seeking portfolio, but you are even farther away from low-delta strikes in currencies like SGD, CAD and AUD---and while 5y5y AUD receiver swoptions are probably still skulking around the same area, CAD rates are higher. </span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<b style="font-weight: normal;"><br /></b></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: white; color: #121212; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">My outright ideas to short CLP and COP are looking relatively good--</span><a href="https://www.bloomberg.com/quote/USDCLP:CUR" style="text-decoration: none;"><span style="background-color: white; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">CLP only recently made a material move stronger</span></a><span style="background-color: white; color: #121212; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> on stronger copper prices, but </span><a href="https://www.bloomberg.com/quote/USDCOP:CUR" style="text-decoration: none;"><span style="background-color: white; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">COP has weakened back above 3000 </span></a><span style="background-color: white; color: #121212; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">on continued weak oil prices and the stagnating domestic economy. </span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<b style="font-weight: normal;"><br /></b></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: white; color: #121212; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">It brings up a dilemma in macro trading, tail hedging, or practically anything I guess--if you have a long time horizon, even in a couple of months you can move far enough away from strike prices to take out the gamma you are supposedly paying up for. I continue to like the hedges I brought up the first time around--heck, they may be even cheaper now. The price action of the past couple of months shows that timing is key...but if you are running a large portfolio you are likely not being paid to make decisions about market timing. </span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<b style="font-weight: normal;"><br /></b></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: white; color: #121212; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">That is why it is of great importance to find tail hedges at a reasonable cost in the context of a broader portfolio that is seeking long-term excess returns for a unit of risk. Otherwise, The Great Volatility Ambien Pill of 2017 will put you to sleep and you’ll wake up with in a bad neighborhood with your wallet missing. </span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<b style="font-weight: normal;"><br /></b></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: white; color: #121212; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The article closes by saying, “Credit, on the other hand, should be a vehicle of economic progress, not a circular thrill ride.” True...but since the breakdown of Bretton Woods, global credit has undoubtedly been a thrill ride of historical proportions. As China continues to ratchet up towards the next peak, we can only speculate when we will reach the top and how steep the inevitable drop will be. </span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<br /></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: white; color: #121212; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">That’s the best I got, Economist writer. Your move. </span><br />
<span style="background-color: white; color: #121212; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span>
Shawn<br />
<a href="mailto:TeamMacroMan@gmail.com">TeamMacroMan2@gmail.com</a><br />
<a href="https://twitter.com/EMinflationista" target="_blank">@EMInflationista</a><br />
<br /></div>
EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com47tag:blogger.com,1999:blog-34323687.post-81833235397571356022017-07-20T04:23:00.003+01:002018-04-14T01:59:52.421+01:00Question for the Class: What Are the Unloved Asset Classes?<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "georgia" , "times new roman" , serif; font-size: large; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Investing is a little like Lake Wobegon, everyone thinks they're above average. We all know that's impossible in the aggregate, especially after fees. </span></div>
<span style="font-family: "georgia" , "times new roman" , serif; font-size: large;"><b id="docs-internal-guid-2d4cf414-5e00-71f2-d792-1ac8c65301fe" style="font-weight: normal;"><br /></b>
</span><br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "georgia" , "times new roman" , serif; font-size: large; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Read any book by the saints of investing history and the same theme comes through time and time again--you have to be outside the herd to outperform. You have to be uncomfortable. You have to see a pot of gold where others see bees and sharks.</span></div>
<span style="font-family: "georgia" , "times new roman" , serif; font-size: large;"><b style="font-weight: normal;"><br /></b>
</span><br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "georgia" , "times new roman" , serif; font-size: large; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Again like the residents of Lake Wobegon, we like to say we're contrarian. But often, we're not. We follow trends, chase performance, and fall victim to any number of cognitive biases. We’re just wired that way. </span></div>
<span style="font-family: "georgia" , "times new roman" , serif; font-size: large;"><b style="font-weight: normal;"><br /></b>
</span><br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "georgia" , "times new roman" , serif; font-size: large; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">With that in mind--what is the out-of-favor, contrarian trade right now? Shorting FANG doesn't count--if you were a long-term investor, what asset class do you put your money in here to maximize risk-adjusted returns? What asset classes have been left behind by the huge asset inflation experienced in markets across the world during the QE-era?</span></div>
<span style="font-family: "georgia" , "times new roman" , serif; font-size: large;"><b style="font-weight: normal;"><br /></b>
</span><br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "georgia" , "times new roman" , serif; font-size: large; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Here are a few options that I believe we can agree to throw out: </span></div>
<ul style="margin-bottom: 0pt; margin-top: 0pt;">
<li dir="ltr" style="background-color: transparent; color: black; font-style: normal; font-variant-caps: normal; font-variant-ligatures: normal; font-weight: 400; list-style-type: disc; text-decoration: none; vertical-align: baseline;"><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "georgia" , "times new roman" , serif; font-size: large; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Domestic stocks, which are trading at valuations never seen this side of the tech bubble, </span></div>
</li>
</ul>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "georgia" , "times new roman" , serif; font-size: large; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="284" src="https://lh3.googleusercontent.com/QQ1cWRhednytKcJkIN7hL3dtIWy7zexAggBaZHjaER8RvyLThIyjX9J10r1OfQfNQhzxpGN59lwk7_yJhrSHgTyp5gSHjmoxCQnrEy-3862Guhc3uVtBS-8gZuS1EUbBMsPP7brV" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="519" /></span></div>
<ul style="margin-bottom: 0pt; margin-top: 0pt;">
<li dir="ltr" style="background-color: transparent; color: black; font-style: normal; font-variant-caps: normal; font-variant-ligatures: normal; font-weight: 400; list-style-type: disc; text-decoration: none; vertical-align: baseline;"><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "georgia" , "times new roman" , serif; font-size: large; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Developed market fixed income</span></div>
</li>
<li dir="ltr" style="background-color: transparent; color: black; font-style: normal; font-variant-caps: normal; font-variant-ligatures: normal; font-weight: 400; list-style-type: disc; text-decoration: none; vertical-align: baseline;"><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "georgia" , "times new roman" , serif; font-size: large; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Credit of virtually any variety I can think of</span></div>
</li>
<li dir="ltr" style="background-color: transparent; color: black; font-style: normal; font-variant-caps: normal; font-variant-ligatures: normal; font-weight: 400; list-style-type: disc; text-decoration: none; vertical-align: baseline;"><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "georgia" , "times new roman" , serif; font-size: large; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Real Estate, which is touching all time low cap rates</span></div>
</li>
</ul>
<span style="font-family: "georgia" , "times new roman" , serif; font-size: large;"><b style="font-weight: normal;"><br /></b>
</span><br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "georgia" , "times new roman" , serif; font-size: large; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="304" src="https://lh3.googleusercontent.com/-b0vfmue7LSmOqGrPApDJXqCUmagGkRxNF0TTTTPNvMf0OqEjZDlFeprF1Qeibmx_LaKPjRcbjOwuBX2znRTKXATriuKKmH6lgoo_6zy7X5iaPfM05m32ehM1YgIf9XDBl288yi1" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="325" /></span></div>
<span style="font-family: "georgia" , "times new roman" , serif; font-size: large;"><b style="font-weight: normal;"><br /></b>
</span><br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "georgia" , "times new roman" , serif; font-size: large; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Going back to the pension funds I brought up last week, as well as a couple of other big real money investors I have poked at since then, the consultant industry is pushing real money towards greater allocations in private equity, which has seen returns above those of public equity markets in recent years. While consultants are by definition incapable of making out-of-consensus recommendations, I think these three charts argue that private equity is far from "contrarian":</span></div>
<span style="font-family: "georgia" , "times new roman" , serif; font-size: large;"><b style="font-weight: normal;"><br /></b>
</span><br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "georgia" , "times new roman" , serif; font-size: large; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">#1….2/3s of private equity’s portfolio companies saw margins contract relative to projections...so PE fund general partners didn’t improve the operations of their companies… </span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "georgia" , "times new roman" , serif; font-size: large; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="256" src="https://lh6.googleusercontent.com/Ye7r7hacTCTxM9g5yG-3vGtiOdXywt5m475nZxTzd7Jx1QrOQujV39SlBtB-cvEzotpcveUMszssi6bLsPDfcjeR6Slx4WPm9p_YCmDEZ4m8xoJrfP7Vuf3ilddIoiTURbpB3zDE" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="454" /></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "georgia" , "times new roman" , serif; font-size: large; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">#2...Yet private equity has done well...why? Multiple expansion</span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "georgia" , "times new roman" , serif; font-size: large; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="281" src="https://lh4.googleusercontent.com/EjQtqd9wnWXTmy-67HPn1BHcVc6PXMD-NXscareurOU1T-bO_QgbMibQZoO1xDBnYxqXocX0sI12QlefcSPo9KLH-yZEkWvbQyFWc2xQcHHmnC0Ta5aOwYZSWCyUalPG-6CKgnjF" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="449" /></span></div>
<span style="font-family: "georgia" , "times new roman" , serif; font-size: large;"><b style="font-weight: normal;"><br /></b>
</span><br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "georgia" , "times new roman" , serif; font-size: large; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">#3... there is $1.4 trillion (!) in “dry powder” looking for the next private equity trade. This is money committed to PE funds but yet to be deployed...all chasing performance in an industry that saw margins contract in 2/3s of their portfolio companies...meaning they didn’t improve the companies, they just got in at a good price. </span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "georgia" , "times new roman" , serif; font-size: large; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="320" src="https://lh4.googleusercontent.com/5EQPiBo4VHx0f-ZmWZ8Zx4H4gGeKj3Cti7FhVxszNEYeKURyqwhVvR9dfsF0ly2si_Q-5vaTGaPP8kwX47fAzubPlBTeSAIH1Dpt5xw88ypW0SaVif71wWstQGQFUMIOqvP4bd6B" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="526" /></span></div>
<span style="font-family: "georgia" , "times new roman" , serif; font-size: large;"><b style="font-weight: normal;"><br /></b>
</span><br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "georgia" , "times new roman" , serif; font-size: large; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">And I’ll spare you another chart---but buyout p/e multiples are at all time highs, and while off of 06-07 highs, debt/ebitda ratios are pretty spicy too. </span></div>
<span style="font-family: "georgia" , "times new roman" , serif; font-size: large;"><b style="font-weight: normal;"><br /></b>
</span><br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "georgia" , "times new roman" , serif; font-size: large; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">What does that leave on the menu? (feel free to add your own here)</span></div>
<ul style="margin-bottom: 0pt; margin-top: 0pt;">
<li dir="ltr" style="background-color: transparent; color: black; font-style: normal; font-variant-caps: normal; font-variant-ligatures: normal; font-weight: 400; list-style-type: disc; text-decoration: none; vertical-align: baseline;"><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "georgia" , "times new roman" , serif; font-size: large; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Foreign Equity, presumably emerging markets</span></div>
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<li dir="ltr" style="background-color: transparent; color: black; font-style: normal; font-variant-caps: normal; font-variant-ligatures: normal; font-weight: 400; list-style-type: disc; text-decoration: none; vertical-align: baseline;"><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "georgia" , "times new roman" , serif; font-size: large; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">EM fixed income, presumably local, not USD</span></div>
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<li dir="ltr" style="background-color: transparent; color: black; font-style: normal; font-variant-caps: normal; font-variant-ligatures: normal; font-weight: 400; list-style-type: disc; text-decoration: none; vertical-align: baseline;"><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "georgia" , "times new roman" , serif; font-size: large; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Foreign Real Estate (cheap markets raise your hand….not so fast, China, Canada and Australia)</span></div>
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<li dir="ltr" style="background-color: transparent; color: black; font-style: normal; font-variant-caps: normal; font-variant-ligatures: normal; font-weight: 400; list-style-type: disc; text-decoration: none; vertical-align: baseline;"><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "georgia" , "times new roman" , serif; font-size: large; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Smart Beta (?)</span></div>
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<li dir="ltr" style="background-color: transparent; color: black; font-style: normal; font-variant-caps: normal; font-variant-ligatures: normal; font-weight: 400; list-style-type: disc; text-decoration: none; vertical-align: baseline;"><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "georgia" , "times new roman" , serif; font-size: large; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Robots, AI, machine learning (?)</span></div>
</li>
<li dir="ltr" style="background-color: transparent; color: black; font-style: normal; font-variant-caps: normal; font-variant-ligatures: normal; font-weight: 400; list-style-type: disc; text-decoration: none; vertical-align: baseline;"><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "georgia" , "times new roman" , serif; font-size: large; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Real Assets...oil/gas, timber, etc.</span></div>
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<li dir="ltr" style="background-color: transparent; color: black; font-style: normal; font-variant-caps: normal; font-variant-ligatures: normal; font-weight: 400; list-style-type: disc; text-decoration: none; vertical-align: baseline;"><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "georgia" , "times new roman" , serif; font-size: large; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Or...here’s the one that always gets people excited...cash. Or even...gasp...gold. </span></div>
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</ul>
<span style="font-family: "georgia" , "times new roman" , serif; font-size: large;"><b style="font-weight: normal;"><br /></b>
</span><br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "georgia" , "times new roman" , serif; font-size: large; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Cash with a touch of gold to protect your purchasing power against profligate central banks will keep you within spitting distance of inflation and is the original long-vol strategy. You have the ability to buy assets at cheaper prices in the future at a time when virtually any asset class I can think of (please chime in with a cheap one!) is expensive by historical standards. </span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "georgia" , "times new roman" , serif; font-size: large; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="280" src="https://lh5.googleusercontent.com/-ItkHjlt2K2ALDEEx87bZlEGJ7PMT_BTSzRY2rkcHDyxx3fS1-C76g9kySOrxqiAqf-v6k0nhPY-vwY_N15csAxyBgqBr_kqlQoOpte49jkCnWzVEGQv44SbqNJnoaLevfyBZ2Lo" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="398" /></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "georgia" , "times new roman" , serif; font-size: large; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">You’re going to feel uncomfortable. You’re friends are going to call you insane. You need to withstand more than a bit of career risk. </span></div>
<span style="font-family: "georgia" , "times new roman" , serif; font-size: large;"><b style="font-weight: normal;"><br /></b>
</span><br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "georgia" , "times new roman" , serif; font-size: large; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">You will be the most boring guy at the next cocktail party. While your friends and colleagues are talking about the next PE unicorn they are chasing, FANG stocks, or dare I say, the pile of money they made in the EMFX carry trade, you’re going to brag about how you squeezed an extra 5bps out of your money market trade by locking in a juicy term reverse repo. Your date might leave with the Argentine guy with amazing hair. </span></div>
<span style="font-family: "georgia" , "times new roman" , serif; font-size: large;"><b style="font-weight: normal;"><br /></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "georgia" , "times new roman" , serif; font-size: large; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Hmm, cash and gold seem to check a lot of boxes. Tell me what asset class you think holds the title. </span></div>
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<span style="font-size: large;">Shawn</span><br />
<a href="mailto:TeamMacroMan@gmail.com"><span style="font-size: large;">TeamMacroMan2@gmail.com</span></a><br />
<a href="https://twitter.com/EMinflationista" target="_blank"><span style="font-size: large;">@EMInflationista</span></a><br />
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<br />EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com67tag:blogger.com,1999:blog-34323687.post-39600047042077067992017-07-17T05:10:00.001+01:002018-04-14T02:00:09.688+01:00Economist Riff of the Week: The Big Mac Index--Buy EUR/SEK<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">As vol continues to strangle any substantive macro trends, we’ll get back into the cycle of Economist articles to lead off the week. </span></div>
<b id="docs-internal-guid-2c502e7b-5044-d8b9-fce7-8259dfa45f8f" style="font-weight: normal;"><br /></b>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">This week’s article for your macro consumption is the annual updating of the </span><a href="https://www.economist.com/news/finance-and-economics/21725034-dollar-has-slipped-over-past-six-months-still-looks-dear-big-mac" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Economist Big Mac Index. </span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">I must confess to having a soft spot for the Big Mac Index. During my freshman year of college, my intro economics prof introduced the concept to the class. I found it fascinating, and it really connected the dots for what this whole endeavor is about--the quest to find some common “currency” by which we can assign value, or at least give us some evidence by which to make some subjective judgements. For me, it suddenly all made sense. By the end of the year I dropped my plan to be a political science major and the rest is history. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="556" src="https://lh3.googleusercontent.com/6WfmG5crr6efvngmbWsgh23VuHH8LxJHUIoJslqYFdSryF1GuPM3WpoDxjPTDK5C-Tf6173F7Fue2wAxloTklCeB6EhgdM1HwCOOA0zpwDBuSMbL17xiNVER81mh_Bwk4UvEwjpg" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="274" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">So there you have it--here’s what I see as the takeaways, modest as they might be: </span></div>
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<br />
<ol style="margin-bottom: 0pt; margin-top: 0pt;">
<li dir="ltr" style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; list-style-type: decimal; text-decoration: none; vertical-align: baseline;"><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Sweden still very high on the “overvalued”, and actually appreciating more. </span></div>
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</ol>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">And it’s had a nice run lately, taking EUR/SEK from 9.80 to 9.53--SEK rates have underperformed EUR rates owing to some relatively good data and the potential for the Riksbank to move off of the lower bound of repo rates. That said, 2y2y rate spreads haven’t done much-- if I were to plot this out on a regression the residual is very close to zero. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="232" src="https://lh5.googleusercontent.com/HFrm9ehGlEn68KhcmQlLqE_waM9q3-ZzXzKk0aRa7f5ZTYluB3I4N3qfm6VojclTOh-WZ_agVJ4-HO18VTa55-KRD6PvGkiURfEIT5I3_9psOBQnO9mWZimPE4_sHArDktKpewvh" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="475" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">I’ll confess that I haven’t spent a great deal of time thinking about the land of my ancestors--but is there a good argument we’ll see a faster normalization of rates by the Riksbank than the ECB? Unlike with the fed, inflation could arguably be converging towards the 2% target. </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Sweden CPI and CPIF (CPI w/ a constant interest rate( source: Statistics Sweden </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="315" src="https://lh6.googleusercontent.com/4GRYD45-0LtSqYbsSLaTsaM676lUNyZRSaX4naFA1rlFr6JvMlFotsju-9_-0UaGT9AkJ48iQj9N9Kd_ar_E1nmS3gbNoEzKAKfEgdWLeInazxuUdqCt4bhW7r702N5xRhKasbOd" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="509" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Growth? Not too shabby.</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">YoY GDP Growth source: Statistics Sweden</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="341" src="https://lh4.googleusercontent.com/Pg9xRUEo_Bf8JkcMrVdH0cSMN6cxVOdSnJ4XIgX_kGNN6S43ZRjSg6WfdTYL7W6UQIrop5IWNJpzSlZf7AvLpFuE8CKNtGCOs4Ilnh-_VnWSoTuPyvxm_hdhPG_p8iXdA2Bbwad7" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="567" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Figures for IP look more encouraging--- likely part of the broader trend in the European business cycle. I’d love to hear anyone with a more educated view here, but looks like eur/sek may have gotten a little ahead of itself. Good spot to take a crack at long eur/sek...9.50 looks likely to provide good resistance and an easy point to walk away if it breaks down and/or there is a persuasive move in the forward rate spread.</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">2) Brazil--BRL has been on a very good run. A very wise friend once told me “when you are bullish, buy BRL. When you are bearish, sell MXN.” Given the political situation in both countries and a convergence in their interest rates, that’s not quite as true as it used to be, but the market sure seems to think so. I continue to like the potential in Brazil, but the politics will continue to be a three-ring-circus--indeed, how many currencies rally when </span><a href="https://www.bloomberg.com/news/articles/2017-07-12/brazil-s-lula-sentenced-to-prison-on-corruption-charges" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">the ex-president is sentenced to almost ten years in prison</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">? Last week I alluded to the Mexican political maxim that “energy reform will be done in darkness.” Well, the metaphorical lights are about to go out in Brasilia...and maybe sooner in Rio. Politicians know what they have to do, they have the goods on the table, and soon they will be forced to do it. Stay long BRL. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">3) ZAR...not as expensive as it used to be--and well, if your answer to the above question was “South Africa”, </span><a href="http://www.latimes.com/world/la-fg-south-africa-zuma-noconfidence-20170529-htmlstory.html" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">you would be correct</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">. I think the question is when to get long here--rates are still attractive, and the only institutional respite in the whole country right now is probably the SARB... and you have the wild card option that Zuma is finally sent packing, to retirement, jail, or Zimbabwe...anywhere other than the presidency.</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="232" src="https://lh6.googleusercontent.com/rS_wylH7UQISW_VAcLM9-Ps0eiIsCSNRqajilJUZjei0t1BQAPhzyi-TDDnkd6-AKqSvQd-6D2C_YwgKaDNUM3v0sJB2cFIw2xPQvUUH5fq-A1Ogo2wvjxrlVO9XACUWbzXw5cY7" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="475" /></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">4) Lastly….I know I am fly-over country, but where in the US does a Big Mac cost over $5? Maybe I buy too many Happy Meals to notice? Who would pay $5.30 for a Big Mac when $7 buys you a burger at Five Guys?</span></div>
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Shawn<br />
<a href="mailto:TeamMacroMan@gmail.com">TeamMacroMan2@gmail.com</a><br />
<a href="https://twitter.com/EMinflationista" target="_blank">@EMInflationista</a><br />
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Update: FRED led me wrong--in the initial version of this post the inflation and growth data I pulled from the normally reliable St. Louis Fed website “FRED” was wrong. I have updated the post to show the correct data, now taken from Statistics Sweden. </span></div>
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EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com5tag:blogger.com,1999:blog-34323687.post-66365590609517359602017-07-17T00:08:00.004+01:002017-07-17T00:08:45.546+01:00Repost: Nassim Taleb, Thanksgiving Turkeys, and Inverse VIX ETFs<div style="background-color: white; color: #222222; font-family: arial, sans-serif; font-size: 12.8px; line-height: 24px; margin-bottom: 24px; outline: transparent solid 0px;">
<span style="background-color: rgba(255, 255, 255, 0); outline: transparent solid 0px;"><i style="outline: transparent solid 0px;">*This will be the last repost, I promise - will no longer use the blogger app that keeps deleting this post*</i></span></div>
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<span style="background-color: rgba(255, 255, 255, 0);"><span style="outline: transparent solid 0px;">We've documented </span><a data-saferedirecturl="https://www.google.com/url?hl=en&q=http://macro-man.blogspot.com/2017/05/market-volatility-reports-of-my-death.html&source=gmail&ust=1500332594180000&usg=AFQjCNEcimaQc2xgBrv8ISf5edLnqVD6sA" href="http://macro-man.blogspot.com/2017/05/market-volatility-reports-of-my-death.html" style="border: 0px; color: #1155cc; font-stretch: inherit; font-variant-numeric: inherit; line-height: inherit; margin: 0px; outline: none; padding: 0px; text-decoration-line: none; vertical-align: baseline;" target="_blank"><span style="border: 0px; font-stretch: inherit; font-style: inherit; font-variant: inherit; line-height: inherit; margin: 0px; outline: transparent solid 0px; padding: 0px; vertical-align: baseline;">here in the past</span><span style="border: 0px; font-stretch: inherit; font-style: inherit; font-variant: inherit; line-height: inherit; margin: 0px; outline: transparent solid 0px; padding: 0px; vertical-align: baseline;"> </span></a><span style="outline: transparent solid 0px;">the dangerous embedded in this current low volatility environment. </span><span style="outline: transparent solid 0px;">If there is a volatility blow up, it is easy to imagine how easily things can snowball out of control. </span><span style="outline: transparent solid 0px;">With that said, one of the areas not covered in minute detail is the prevalence of inverse VIX ETFs.</span></span></div>
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<span style="background-color: rgba(255, 255, 255, 0);"><span style="outline: transparent solid 0px;">Before getting into that, here is some free promotion for Nassim Taleb's Fooled By Randomness and Black Swan books.</span></span></div>
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<span style="background-color: rgba(255, 255, 255, 0);"><span style="outline: transparent solid 0px;">In one of the books (can't remember which one), Taleb pompously explains the simple concept pertaining the flaws of logic, the dangers of using specific incidences to reach general conclusions. One variant of this is using the past to predict the future. Amidst his grandiose and philosophically ridden text is quite a simple and down to earth example.</span><br style="outline: transparent solid 0px;" /><br style="outline: transparent solid 0px;" /><span style="outline: transparent solid 0px;">There is a turkey who is fed and taken care of until it is Thanksgiving time. If one was to chart the well-being of a turkey through this course of events, it would go something like so:</span></span></div>
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<span style="background-color: rgba(255, 255, 255, 0);"><span style="outline: transparent solid 0px;">Now, when my parents heard I was trading my own money (back in undergrad...ah...those were the days), they frequently asked me whether I can lose everything in one day (they've heard the folktales and war stories of market-on-participant violence). I repeatedly said "No!".</span><br style="outline: transparent solid 0px;" /><br style="outline: transparent solid 0px;" /><span style="outline: transparent solid 0px;">Even during the most violent market crashes, there are a number of opportunities for non-institutional participants to get out. 1987 is the example of the most violent and immediate market crash I personally know. Even then, market participants with a nose for market timing had a few chances to exit the market with relatively mild losses or even be able to profit.</span></span></div>
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<span style="background-color: rgba(255, 255, 255, 0); outline: transparent solid 0px;">Then came 2017 and the prevalence of inverse VIX ETFs. Let's read a description excerpt from one of these bad boys.</span></div>
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<span style="background-color: rgba(255, 255, 255, 0);"> <span style="border: 0px; font-stretch: inherit; font-style: inherit; font-variant: inherit; line-height: inherit; margin: 0px; outline: transparent solid 0px; padding: 0px; vertical-align: baseline;"><i style="border: 0px; font-stretch: inherit; font-variant: inherit; line-height: inherit; margin: 0px; outline: transparent solid 0px; padding: 0px; vertical-align: baseline;">The investment seeks to replicate, net of expenses, the<b style="border: 0px; font-stretch: inherit; font-style: inherit; font-variant: inherit; line-height: inherit; margin: 0px; outline: transparent solid 0px; padding: 0px 0.25em; vertical-align: baseline;"> inverse of the daily performance </b>of the S&P 500 VIX Short-Term Futures index.<b style="border: 0px; font-stretch: inherit; font-style: inherit; font-variant: inherit; line-height: inherit; margin: 0px; outline: transparent solid 0px; padding: 0px 0.25em; vertical-align: baseline;"> </b>The index was designed to provide investors with exposure to one or more maturities of futures contracts on the VIX, which reflects implied volatility of the S&P 500 Index at various points along the volatility forward curve.</i></span></span></div>
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<span style="background-color: rgba(255, 255, 255, 0);"><br style="outline: transparent solid 0px;" /><span style="outline: transparent solid 0px;">That statement brings up some intriguing questions:</span></span></div>
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<span style="background-color: rgba(255, 255, 255, 0);"><br style="outline: transparent solid 0px;" /><span style="outline: transparent solid 0px;">What happens when, in one session, the VIX increases by 100% or more?</span><span style="outline: transparent solid 0px;"><br /></span></span></div>
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<span style="background-color: rgba(255, 255, 255, 0);"><span style="outline: transparent solid 0px;">Has that happened? </span><span style="outline: transparent solid 0px;">What happens to inverse VIX ETFs then?</span></span></div>
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<span style="background-color: rgba(255, 255, 255, 0);"><span style="outline: transparent solid 0px;">What if the VIX increases by 50% or more - what happens to levered positions on inverse VIX ETFs? etc. etc.</span><br style="outline: transparent solid 0px;" /><br /><br style="outline: transparent solid 0px;" /><span style="outline: transparent solid 0px;">First, has it happene</span></span><span style="background-color: rgba(255, 255, 255, 0); font-size: 12.8px;">d?</span></div>
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<span style="background-color: rgba(255, 255, 255, 0);"><span style="outline: transparent solid 0px;">I looked at two different volatility gauges - the VIX directly and the older VXO (volatility for S&P 100) indicatively. Clearly, there is little that bounds these volatility gauges from appreciating upwards of 100% on a daily basis.</span><br style="outline: transparent solid 0px;" /><br style="outline: transparent solid 0px;" /><span style="outline: transparent solid 0px;">In fact, here are the times in history (of data available to me) when you would've gone bust holding these inverse VIX ETFs, if they existed in the past. I looked at both daily returns (prev day close vs next day close) and intraday returns (prev day close vs next day high).</span><br style="outline: transparent solid 0px;" /><br style="outline: transparent solid 0px;" /><span style="outline: transparent solid 0px;">I looked at scenarios with 0 leverage, 2x leverage and 3x leverage (believe it or not, I know of retail participants trading inverse VIX ETFs on leverage). I crunched some numbers and built a matrix with the 25 biggest return days in each scenario for each instrument. </span><b style="border: 0px; font-stretch: inherit; font-variant-numeric: inherit; line-height: inherit; margin: 0px; outline: transparent solid 0px; padding: 0px 0.25em; vertical-align: baseline;">Times, when one would go bust, are in bold. Calculations are indicative as I am looking at spot VIX.</b></span></div>
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<span style="color: black;"><span style="background-color: rgba(255, 255, 255, 0);"><br style="outline: transparent solid 0px;" /><span style="outline: transparent solid 0px;">So yes, it's possible to go bust when these volatility gauges spikes, especially when levered.</span></span></span></div>
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<span style="color: black;"><span style="background-color: rgba(255, 255, 255, 0);"><span style="outline: transparent solid 0px;">What will those ETF instruments do when they </span><i style="border: 0px; font-stretch: inherit; font-variant-numeric: inherit; line-height: inherit; margin: 0px; outline: transparent solid 0px; padding: 0px; vertical-align: baseline;">should</i><span style="outline: transparent solid 0px;"> </span><i style="border: 0px; font-stretch: inherit; font-variant-numeric: inherit; line-height: inherit; margin: 0px; outline: transparent solid 0px; padding: 0px; vertical-align: baseline;">be</i><span style="outline: transparent solid 0px;"> down 100% or more?</span><br style="outline: transparent solid 0px;" /><br style="outline: transparent solid 0px;" /><span style="outline: transparent solid 0px;">From reading the </span><span style="border: 0px; font-stretch: inherit; line-height: inherit; margin: 0px; outline: transparent solid 0px; padding: 0px; vertical-align: baseline;"><a data-saferedirecturl="https://www.google.com/url?hl=en&q=http://app.velocitysharesetns.com/files/prospectus/CS_VIX_VelocityShares_ETN_Amended_Final_Pricing_Supplement_AR46_long-form_1.PDF&source=gmail&ust=1500332594180000&usg=AFQjCNH46vIR4ppxIrt1INBjXOZMxTihHQ" href="http://app.velocitysharesetns.com/files/prospectus/CS_VIX_VelocityShares_ETN_Amended_Final_Pricing_Supplement_AR46_long-form_1.PDF" style="border: 0px; color: #1155cc; font-stretch: inherit; font-style: inherit; font-variant: inherit; line-height: inherit; margin: 0px; outline: none; padding: 0px; text-decoration-line: none; vertical-align: baseline;" target="_blank"><span style="border: 0px; font-stretch: inherit; font-style: inherit; font-variant: inherit; line-height: inherit; margin: 0px; outline: transparent solid 0px; padding: 0px; vertical-align: baseline;">prospectus</span></a> </span><span style="outline: transparent solid 0px;">it seems that an event of a spike in volatility occurs, it would be an "Acceleration Event" defined as:</span></span></span></div>
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<span style="background-color: rgba(255, 255, 255, 0);"> <b style="border: 0px; font-stretch: inherit; font-style: inherit; font-variant: inherit; line-height: inherit; margin: 0px; outline: transparent solid 0px; padding: 0px 0.25em; vertical-align: baseline;"><i style="border: 0px; font-stretch: inherit; font-variant: inherit; font-weight: inherit; line-height: inherit; margin: 0px; outline: transparent solid 0px; padding: 0px; vertical-align: baseline;"> includes any event that adversely affects our ability to hedge or our rights in connection with the ETNs, including, but not limited to, if the Intraday Indicative Value is equal to or less than 20% of the prior day’s Closing Indicative Value.</i></b></span></div>
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<span style="background-color: rgba(255, 255, 255, 0);"><span style="outline: transparent solid 0px;">where the manager of the ETF will liquidate its assets and proceeds distributed.</span><br style="outline: transparent solid 0px;" /><b style="border: 0px; font-stretch: inherit; font-variant-numeric: inherit; line-height: inherit; margin: 0px; outline: transparent solid 0px; padding: 0px 0.25em; vertical-align: baseline;"><br style="margin: 0px; outline: transparent solid 0px; padding: 0px;" /></b><span style="outline: transparent solid 0px;"></span><b style="border: 0px; font-stretch: inherit; font-variant-numeric: inherit; line-height: inherit; margin: 0px; outline: transparent solid 0px; padding: 0px 0.25em; vertical-align: baseline;">It's almost as if Nassim Taleb specifically built an instrument to illustrate his turkey concept.</b><br style="outline: transparent solid 0px;" /><br style="outline: transparent solid 0px;" /><span style="outline: transparent solid 0px;">What about the larger market impact?</span><br style="outline: transparent solid 0px;" /><br style="outline: transparent solid 0px;" /><span style="outline: transparent solid 0px;">From my digging, there seemed to upwards of 2.5 billion dollars invested in different VIX funds, mostly short vol in the form of XIV.</span></span></div>
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<span style="background-color: rgba(255, 255, 255, 0);"><span style="outline: transparent solid 0px;">Although 2.5 billion dollar seems small in the grand scheme of an entire financial market. It is still a sizable amount held by retail that can potentially disappear into thin air.</span><br style="outline: transparent solid 0px;" /><br style="outline: transparent solid 0px;" /><span style="outline: transparent solid 0px;">Yield enhancement of a portfolio is all well and fine but there are ways to do it, and ways not to do it. There are also times to do it, and times when you shouldn't. Something to chew on.</span><br style="outline: transparent solid 0px;" /><br style="outline: transparent solid 0px;" /><span style="outline: transparent solid 0px;">I assume not too many Macro-Man readers are collecting nickels via these inverse VIX ETFs at this point of the market cycle. But if you are, congrats on the money you've piled up - and you should probably reduce positions to an amount you're okay with, if it evaporates in a day's time.</span><br style="outline: transparent solid 0px;" /><br style="outline: transparent solid 0px;" /><b style="border: 0px; font-stretch: inherit; font-variant-numeric: inherit; line-height: inherit; margin: 0px; outline: transparent solid 0px; padding: 0px 0.25em; vertical-align: baseline;">Portfolio Updates:</b></span></div>
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<span style="background-color: rgba(255, 255, 255, 0);"><span style="border: 0px; font-stretch: inherit; line-height: inherit; margin: 0px; outline: transparent solid 0px; padding: 0px; vertical-align: baseline;"><b style="border: 0px; font-stretch: inherit; font-style: inherit; font-variant: inherit; line-height: inherit; margin: 0px; outline: transparent solid 0px; padding: 0px 0.25em; vertical-align: baseline;"><a data-saferedirecturl="https://www.google.com/url?hl=en&q=http://macro-man.blogspot.com/2017/05/crude-realities.html&source=gmail&ust=1500332594181000&usg=AFQjCNF6nvGqFfAJ2ov7LLqsNUqDAIBayA" href="http://macro-man.blogspot.com/2017/05/crude-realities.html" style="border: 0px; color: #1155cc; font-stretch: inherit; font-style: inherit; font-variant: inherit; font-weight: inherit; line-height: inherit; margin: 0px; outline: none; padding: 0px; text-decoration-line: none; vertical-align: baseline;" target="_blank"><span style="border: 0px; font-stretch: inherit; font-style: inherit; font-variant: inherit; font-weight: inherit; line-height: inherit; margin: 0px; outline: transparent solid 0px; padding: 0px; vertical-align: baseline;">Short oi</span><span style="outline: transparent solid 0px;">l</span></a></b><span style="outline: transparent solid 0px;">.</span></span><span style="outline: transparent solid 0px;"> There are </span><b style="border: 0px; font-stretch: inherit; font-variant-numeric: inherit; line-height: inherit; margin: 0px; outline: transparent solid 0px; padding: 0px 0.25em; vertical-align: baseline;">a few tidbits regarding oil that has prompted me to cover Thursday</b><span style="outline: transparent solid 0px;">. First Venezuela is a mess and there is the possibility that no oil comes out of the country. This is a concern for a short like me, as they are a huge global oil producer.</span></span></div>
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<span style="background-color: rgba(255, 255, 255, 0); font-size: 12.8px;">Additionally, higher US rates scare me as they can put meaningful pressure on US producers, which can lead to a reduction of supply.</span></div>
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<span style="background-color: rgba(255, 255, 255, 0);"><span style="outline: transparent solid 0px;">Thirdly, the chart's just not cooperating for oil - seems to be making a bottom.</span></span></div>
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<span style="background-color: rgba(255, 255, 255, 0);"><span style="outline: transparent solid 0px;">Lastly, perma-bull Andy Hall</span><a data-saferedirecturl="https://www.google.com/url?hl=en&q=https://www.ft.com/content/ef36c7de-623d-11e7-91a7-502f7ee26895&source=gmail&ust=1500332594181000&usg=AFQjCNGsVGNNefKzpFSW-70o_Alh7GLScg" href="https://www.ft.com/content/ef36c7de-623d-11e7-91a7-502f7ee26895" style="border: 0px; color: #1155cc; font-stretch: inherit; font-variant-numeric: inherit; line-height: inherit; margin: 0px; outline: none; padding: 0px; text-decoration-line: none; vertical-align: baseline;" target="_blank"><span style="border: 0px; font-stretch: inherit; font-style: inherit; font-variant: inherit; line-height: inherit; margin: 0px; outline: transparent solid 0px; padding: 0px; vertical-align: baseline;"> </span><span style="border: 0px; font-stretch: inherit; font-style: inherit; font-variant: inherit; line-height: inherit; margin: 0px; outline: transparent solid 0px; padding: 0px; vertical-align: baseline;">threw in the proverbial towel</span></a><span style="outline: transparent solid 0px;"> a week ago. I know it's anecdotal, but I think it speaks volumes regarding this market's sentiment.</span><br style="outline: transparent solid 0px;" /><br style="outline: transparent solid 0px;" /><span style="outline: transparent solid 0px;">Even if the oil market goes lower, there will probably be an easier time to go back short - when it feels less like I am fighting the market.</span><br style="outline: transparent solid 0px;" /><br style="outline: transparent solid 0px;" /><a data-saferedirecturl="https://www.google.com/url?hl=en&q=http://macro-man.blogspot.com/2017/06/oh-how-market-turns.html&source=gmail&ust=1500332594181000&usg=AFQjCNGh9pwVnPuPqM7P8zh4bTHiP0sBOA" href="http://macro-man.blogspot.com/2017/06/oh-how-market-turns.html" style="border: 0px; color: #1155cc; font-stretch: inherit; font-variant-numeric: inherit; line-height: inherit; margin: 0px; outline: none; padding: 0px; text-decoration-line: none; vertical-align: baseline;" target="_blank"><span style="border: 0px; font-stretch: inherit; font-style: inherit; font-variant: inherit; line-height: inherit; margin: 0px; outline: transparent solid 0px; padding: 0px; vertical-align: baseline;"><b style="border: 0px; font-stretch: inherit; font-style: inherit; font-variant: inherit; line-height: inherit; margin: 0px; outline: transparent solid 0px; padding: 0px 0.25em; vertical-align: baseline;">Short equities</b></span></a><span style="outline: transparent solid 0px;">, we have seen the rally that I believed was in the cards - now will tech top out at this potentially lower high? I loaded up on an even bigger position Thursday. Will be either vindicated or stopped out within the next three sessions.</span></span></div>
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<a data-saferedirecturl="https://www.google.com/url?hl=en&q=http://macro-man.blogspot.com/2017/07/inflation-pressures-building-behind-jpy.html&source=gmail&ust=1500332594181000&usg=AFQjCNGD5Tv5qLtnhYUWECoIMxBQvwgMuQ" href="http://macro-man.blogspot.com/2017/07/inflation-pressures-building-behind-jpy.html" style="border: 0px; color: #1155cc; font-size: 12.8px; font-stretch: inherit; font-variant-numeric: inherit; line-height: inherit; margin: 0px; outline: none; padding: 0px; text-decoration-line: none; vertical-align: baseline;" target="_blank"><span style="border: 0px; font-stretch: inherit; font-style: inherit; font-variant: inherit; line-height: inherit; margin: 0px; outline: transparent solid 0px; padding: 0px; vertical-align: baseline;"><b style="border: 0px; font-stretch: inherit; font-style: inherit; font-variant: inherit; line-height: inherit; margin: 0px; outline: transparent solid 0px; padding: 0px 0.25em; vertical-align: baseline;">Long USDJPY</b></span></a><b style="border: 0px; font-size: 12.8px; font-stretch: inherit; font-variant-numeric: inherit; line-height: inherit; margin: 0px; outline: transparent solid 0px; padding: 0px 0.25em; vertical-align: baseline;">. </b><span style="font-size: 12.8px; outline: transparent solid 0px;">Unlimited. Bond. Purchases. If JGB yields rise with the rest of the world's duration, then the BOJ has to buy more. The more the BOJ owns, the less liquidity that market will be and the more broken that market will become (just ask any bond trader).</span></div>
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<span style="background-color: rgba(255, 255, 255, 0);"><b style="border: 0px; color: #222222; font-stretch: inherit; font-variant-numeric: inherit; line-height: inherit; margin: 0px; outline: transparent solid 0px; padding: 0px 0.25em; vertical-align: baseline;">A reflexive process can potentially take hold here: the weaker the Yen becomes, fewer participants who are not mandated to hold JGBs will want to own them (not to mention less liquidity in the market). The less they want to own them the more they will want to sell. The more they will sell means that the BOJ will have to print more Yen to buy JGBs and also coincidentally make JGBs less attractive vis-à-vis the currency and also killing the market's liquidity. </b></span></div>
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<b style="border: 0px; color: #222222; font-size: 12.8px; font-stretch: inherit; font-variant-numeric: inherit; line-height: inherit; margin: 0px; outline: transparent solid 0px; padding: 0px 0.25em; vertical-align: baseline;">So how much Yen will the BOJ have to print in order to buy an asset that most will not want to own? I don't know but probably a lot. Probably moar.</b></div>
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<span style="background-color: rgba(255, 255, 255, 0);"><span style="color: #222222; outline: transparent solid 0px;">For all the commodity heads who follow the blog - look out for an upcoming softs post. Soft commodities, especially cocoa, are starting to look very interesting from the long side.</span><br style="outline: transparent solid 0px;" /><br style="outline: transparent solid 0px;" /><span style="color: #222222; outline: transparent solid 0px;">Thanks all, as always, good luck out there.</span></span></div>
Macro Clownhttp://www.blogger.com/profile/17196568155114537578noreply@blogger.com33tag:blogger.com,1999:blog-34323687.post-9567987498350020092017-07-13T06:22:00.001+01:002018-04-14T01:41:44.150+01:00As the Market Turns II....Time to short AUD?<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">I know there are more than a few of you that have been disappointed not to see an Economist piece this week...but crikey, it was a bit of a snoozer this week. On the cover….</span><a href="https://www.economist.com/news/leaders/21724810-country-saves-too-much-and-spends-too-little-why-germanys-current-account-surplus-bad" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">the German current account surplus</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">? This is breaking news? Next week...Leicester City closes in on the title….I wonder if they kept this one in the hopper for the week when there simply wasn’t anything else to talk about. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Getting down to business...Yellen delivered the requisite “kinda, sorta, we mean it, but we are looking at inflation” speech that should be standard issue by this point, but seemed to catch the market a little off guard, or perhaps more accurately, gave a few fast money types an excuse take some chips off the table before that two-weeker in the Hamptons. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Meanwhile, Bunds didn’t really decide what to do with themselves...but the day is coming. You don’t see this kind of selloff every day--tough to believe this is going to be the new range. Seems more likely to me we’ll see a consolidation back towards the 40-50bp range until we get a better clue on the next moves for the ECB, or more data on growth, inflation, etc. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="232" src="https://lh5.googleusercontent.com/ff0uTHA7A76ua_4HlQKNQUHgFrPrQgO_ADdRCy4ADSk3mnpFE9T_XUthtGfzd4HKG64mF971j9thb7EUdxar8luW_j6KklMXW6ivjnLk6NC9lk1xInU6fNSmUsShPsqrAnIgX2BK" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="475" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Meanwhile, Canadian rates followed along reluctantly--tightening 2-3bps in the belly after Poloz went ahead and pulled the trigger on the first rate hike since The Red Green Show was still on the air. The media rhetoric on the statement was relatively neutral, no real smoking guns--no mention of housing prices, and some emphasis on the broad-based nature of the recent pickup in growth. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">I haven’t torn apart the quarterly report yet, but I am looking forward to it! In the statement, the fact Poloz wanted to highlight “r</span><span style="background-color: white; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">ecent data has increased confidence the economy will continue to grow above potential” is important, since it was the lack of momentum to close the output gap that caused the BoC to keep kicking the can down the road on rates normalization. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="232" src="https://lh6.googleusercontent.com/smwysqOpWF8qP4lZsu5Am1ZSLc5CBfWDhD5cbFhS4dYYsITqyRead_l546CECZmme3lMrhK4StPwJneDT_kzc9BcfUsCKkP9UD7kBUBLn9cWDZZTYVq1szNyqxfKEk2vhojXQ0xO" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="475" /></span></div>
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<span style="background-color: white; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">That gives us a nice segue into FX...CAD continues its impressive run, weighing in as the G10 champion since the global rates selloff began on June 23. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="260" src="https://lh4.googleusercontent.com/439CjRfH8-NVBc2khscWitNyb2S0MB2JW6FBB3MoTHs_J1wQ9dBbyucrRiVzaqoMzi-KXfri9S3tkLZnQzf_SZFiCz8uiwEu9Dm4QDtAMeSSH0fMnrG-FQX_kbovVqLTVKINp0Dx" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></div>
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<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Commodity currencies aren’t really moving together--CAD obviously leading after the bike, but some diffusion between AUD, NZD and NOK as well. </span></div>
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<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">AUD stands out a bit for me here. The industrial metals Australia cares about aren’t doing much...and are holding in near YTD highs despite the downward pressure in energy prices. Natgas exports mean that fall in energy prices isn’t a big a boon to terms of trade as it used to be, but it is still positive. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="232" src="https://lh6.googleusercontent.com/cfftZ1oQjiuKSOcOvndhN_0Rfj8vSn_zrUTYwEjnzEAhYltEoZ2lIKyIhql-LeuSCtlBKENXHlsyTBqgcJJ0_khDaE8CYdZSg6dzZTwZ5v_qVC8C8U0SB3Fm93KXMUfM5IVgcFP0" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="475" /></span></div>
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<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Given Yellen didn’t really say much to throw cold water on the Fed’s stated plans, and risk markets are as healthy as ever, I’m looking to get long USD. Looks like a nice entry point here vs. AUD, and sets up nicely if you want to get short the China credit story. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="232" src="https://lh4.googleusercontent.com/2ePfZTX1TEkJtOWx4uYNBRSKFuIvdSuq238E_bWI__aNUv989ppp8oOyuTAizyy8m_jsWAxSdxgf81HVs4LDIanS26t74BafJIGJgqPJLB11fe93tA6f_VXn357cw70UYYwOhvnW" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="475" /></span></div>
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<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The toppiness of that chart seems a little overdone given how rates have been moving in lockstep, despite the US engaging in a hiking cycle (such as it is, post-QE)</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="232" src="https://lh4.googleusercontent.com/hIvlCzfc6-NmtfVFSXwfneLS-i1KtZuZolQLjUdgFoycywEHqNG478xnwv32DI0ZdASc5_R0eSwHJr7UPcWY4rKQet4HDG62amuLl9iLHPZqN4oq7JKV68BXvdTUUl4GkSyhx_j9" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="475" /></span></div>
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<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">But is the RBA about to throw open the flood gates on HawkTalk 2017? </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">If they are, no sign of it yet. Safe to say there is virtually nothing priced in to the curve for the rest of the year. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="277" src="https://lh6.googleusercontent.com/PbTwFp2JbKIcQjRM-l7y5nufjoEWK3wDXFVoMrffTYqT-Wa_ddENuTxhK0RYCiiRvHpMT1dSuTVprN-crPwNefGcSkJqk7984eKkU41PVE4ouzEs6M7Mj6CTkGBR1T0hgxYiu_jA" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></div>
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<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">“Underlying inflation” is checking up off the lows as it is in a few different countries, which could be worrisome for an AUD short...</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="320" src="https://lh4.googleusercontent.com/4IGrWLYt9UDQBoPXJ7pQeIcNEZOlcadIf2L-QVy0n1WV3kEfPmyeHF3FZ32-totcXyG-tcOtY7YCeKyA5wck1lS3QZoqYOZ1sK9n_bgftYyrfu79JWWrAmSuD_mA0L8gxdUmK2vD" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="339" /></span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">’</span></div>
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<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">But growth figures have been lousy...</span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="320" src="https://lh5.googleusercontent.com/4ZZmTgwJiaKgMgB84JelMZPjI5n0ICzuEs4Y4pUZkVnAibdXwkhTOuotXrK5g3E6ca_xxaKINl0VfsyFu8AuKw6zkf4z2U0nB5jAvRhdAKjxHQD7TXFYwdSCn-ZLQJtP_Trbk7tR" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="367" /></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">And wage growth has been even worse. The RBA is going to be in no hurry at all. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="318" src="https://lh6.googleusercontent.com/NYPRtFoSyewX3y_7stxm3VIa4JkODPI5w2mZIKbsEJvSiwDNnkgXrlKf1FOCUCW8bzzffm1RNuq145ja6Uelyv1Gp-l-8gChcIbaSmN9URTBHMiNSJlxgFGRQuhp6xWQxapm0Nkf" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="365" /></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">So in a boring, low vol market, short AUD looks like a good, low carry way to get some risk-off exposure while potentially setting up for a larger move if the Australian miracle is finally coming to an end and/or some air comes out of the China bubble in the upcoming weeks and months....or if we simply see a USD resurgence on the crazy notion that these guys are actually hiking rates, rather than just talking about it. </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Not a strong view here, but a good starting point. Will dig deeper next week.</span></div>
<br />
Shawn<br />
<a href="mailto:TeamMacroMan@gmail.com">TeamMacroMan@gmail.com</a><br />
<a href="https://twitter.com/EMinflationista" target="_blank">@EMInflationista</a>EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com8tag:blogger.com,1999:blog-34323687.post-66859831149273501232017-07-10T05:08:00.000+01:002018-04-14T01:40:18.121+01:00Pension Fund Posts...So What's the Trade?I've devoted significant <a href="http://macro-man.blogspot.com/2017/07/yield-hungry-yield-hungry.html" target="_blank">time and space</a> to the <a href="http://macro-man.blogspot.com/2017/07/its-106-miles-to-illinois-pension-fund.html" target="_blank">investment strategies of US public pension funds</a> <span id="goog_1595093656"></span><a href="https://www.blogger.com/"></a><span id="goog_1595093657"></span>over the past couple of days.<br />
<br />
This blog is called "Macro Man". Not "Shawn's diatribes".<br />
<br />
So what's the trade?<br />
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The reason I didn't include any trade ideas in either of the original posts is because it isn't entirely clear to me what they are. Are we at a tipping point, the middle of the trend, or way too far ahead of the curve here? I'm not sure.<br />
<br />
Here's what I thought as I put this together:<br />
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1) The one thing I think was clear in the two pieces was that the investment consulting industry is pushing pension funds to take more risk in alternatives. This is absolutely a function of easy monetary policy. Another taper tantrum could turn into a bad accident. The market is very complacent to this risk, even after the last couple weeks of hawkish rhetoric, higher rates, media attention, etc. Buy gamma.<br />
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2) Inflation. Accelerating inflation would likely help on the asset side (equities, "real return") and limit the damage on the liability side, depending on how each system indexes benefits. Also supportive of buying the dips in linkers. However, as mentioned in #1, higher real rates are negative--fixed income, credit and equities get hurt, with potential disastrous consequences in frothy/bubbly markets.<br />
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3) Equity names like JP Morgan, Goldman Sachs, Bank of America, Blackrock, and Blackstone are well positioned to take advantage of these trends.<br />
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3a) The combination of the move towards more alternatives among institutional investors and the broader rotation towards indexing among retail investors is indeed a big threat for asset management firms that are levered to traditional mutual funds. How are these companies adapting to these trends? Are they digging in, circling the wagons and relying on hope? Are they diversifying into alternatives? Will "smart beta" save the day? <i>(I doubt it--ed.)</i> Are all of us PMs and analysts going to be replaced by robots? <i>(will their pieces be shorter than yours? ed.)</i> Long banks, short traditional asset managers? Seems too clever by half.<br />
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4) Muni curves should probably be steeper. Pension reform will fix these problems, but global experience suggest that means states explicitly taking these liabilities onto their balance sheet. That said, I have very little (well, actually zero) experience trading munis. 10/30s muni steepener, hedged with 10/30 ust? Again, too clever by half.<br />
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5) All DM governments are insolvent. Buy gold. Hat tip to Albert Edwards.<br />
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That's all I got. Anyone have anything more persuasive?<br />
<br />
Shawn<br />
<a href="mailto:TeamMacroMan@gmail.com">TeamMacroMan@gmail.com</a><br />
<a href="https://twitter.com/EMinflationista" target="_blank">@EMInflationista</a><br />
<br />EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com24tag:blogger.com,1999:blog-34323687.post-70194972013642930092017-07-09T23:00:00.000+01:002018-04-14T01:38:20.038+01:00It's 106 miles to Illinois Pension Fund Solvency. It's Dark. And We're Wearing Sunglasses.<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Today I spent some time skimming </span><a href="http://trs.illinois.gov/pubs/cafr/FY2016/FY16.pdf" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">the annual report of the Illinois Teachers Retirement System pension fund</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">. Because I'm weird like that. While a number of critics have whacked this piñata, I believe they have (rightly) done so on philosophical grounds surrounding fees, taxpayer and employee contributions, and actuarial assumptions. As with many things in life, these issues obscure the real bottom line: performance. Let's take a look at some numbers.</span></div>
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<b id="docs-internal-guid-781b5c34-2776-f587-4465-e3806fc0b754" style="font-weight: normal;"><br /></b></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">As of this time last year, the fund had $124bn in liabilities against $45bn in assets. In the words of the report…”The unfunded actuarial accrued liability was $71.4 billion at June 30, 2016. The funded ratio was 39.8 percent at June 30, 2016.” Those are some brutal numbers. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">$71bn!! Let’s get the crack investment staff on the case...we need to make some money! </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="369" src="https://lh6.googleusercontent.com/0eYc9gwRaErxboKFegBBbAGstZdBNTMYKTxVbGREzEXySeBlWntVgk_e-7FTccYjT6EGcE9svjkUmi5wDtpZOry4nCaEXj9ZffNBb60RtzTvI2O6f6Qt_5JPN8n_g7alLCcJXyUT" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="579" /></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Alas...In 2016 the net return on that $45bn in assets was </span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 700; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">zero</span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">. A scant 240bps south of the benchmark. Yet liabilities went up by about $14bn, owing to demographic changes, a lower assumed future rate of return and lower discount rates of future obligations. Five and ten-year returns are also showing a consistent underperformance--but the liability side of the balance sheet continues its unyielding rise. </span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<b style="font-weight: normal;"><br /></b></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Results for the fiscal year that just ended aren’t available yet. </span><a href="http://trs.illinois.gov/investments/portfolio.htm" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Judging by results through the 3rd quarter</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">, it looks like they had a decent year of returns...that might keep the plates spinning a little longer...but you can see by the 2016 numbers that the gap is just too big to close with any rational investment strategy. </span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<b style="font-weight: normal;"><br /></b></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">To ostensibly deal with this problem of systematic underperformance and low returns, the best consultants money can buy gave this fund a new asset allocation plan.</span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;"> Less investment in public equities, and more in private equity.</span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> </span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Less in cash and fixed income, more in "real return",</span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> which is code for investments that have a return above that of inflation. Here’s the plan: </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="279" src="https://lh6.googleusercontent.com/d2IiUfEysOtYbF66onaSDyPmdxNlmRM0zCjGbBKUn9rbId0Wv7wGYV5soJ7ILoflPMoYo0xdI4Ysfk4PF0UDdOKfsOWW1S0e-tR3sLts15hV8IIfFTscYxYUAdBfaOwNhZj8kGd3" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="562" /></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">What does it mean? Less liquidity. More fees. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Alright-- I’ll be the last one to discourage alternative investments at large. The bottom line is performance--will this lead to higher risk-adjusted returns? The proof is in the pudding. How has the fund done historically in these asset classes? Illinois TRS has underperformed their private equity benchmark (Russell 3k + 300bps) </span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 700; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">each of the past five years</span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">--which summed up to 4.9% over the five year period. In the “real return” bucket, the fund’s assets have underperformed dramatically in four of the past five years, and a total of 4.6% compounded over the five year period relative to the benchmark, which is CPI +5%. </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">By my back-of-the-envelope math that adds up to about $1.4bn left on the table in private equity relative to benchmark returns, or over 3% of AUM...and $720mm, or 1.7% of AUM in real return. Over $2bn in underperformance and 5% of AUM, just in two relatively small asset classes! And you can probably slap another 1% of NAV to that in management fees above and beyond long-only traditional equity and fixed income managers. A billion here...a billion there…pretty soon you’re talking about real money. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">As the fund continues in its quest for investing alchemy, the author of the report describes private equity as such: “Investing in private equity carries additional risk, but with skillful selection of managers, returns can be significantly higher than public equity investments.” </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Indeed...but the author has no explanation for why they are so fantastically </span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">unskillful </span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">at it. Over the last five years the Illinois TRS private equity bucket has underperformed not only its benchmark but also the publicly traded domestic equity bucket. The author also fails to address the reason private equity returns can be higher than public equities: because you can take advantage of small-to-medium sized investments in companies that don’t have access to public markets or have a compelling reason to stay private (venture capital, mezzanine/convertible debt, distressed debt, etc.), or large investments that are often turnaround stories or capital structure arbitrage (LBOs). </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Infinite amounts of money don’t have higher rates of return than public equities simply because you wish it to be so. Illinois TRS already has $5.3bn invested in this space. What opportunities are they, or the PE market at large, not already exploiting with that kind of size? Who are they going to hand a </span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 700; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">billion dollars</span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> to that will do better than their current PE investments? </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">This is the strategy their consultants suggest they double down on--but there is also no explanation in the report as to why they are increasing their allocation at the expense of more liquid strategies, or why we should expect greater risk-adjusted returns in a space that has seen a </span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: 700; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">$1.2trn</span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> increase in AUM since 2010, with another $500bn waiting on the sidelines looking for the next unicorn.</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="269" src="https://lh4.googleusercontent.com/yO6bH7AqRKwCeBRCuFtlHEtdp8qV-35-8jUmSvWXYXefadcfoerfGeMUzmkK19F4kwJvyI4S3U11gf1XLyh3ewaVkfnQhyomA-1HVjVI9XNoIpVF7XIVGhHQeO97PuDLvvnZxsKH" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="500" /></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Illinois TRS isn’t alone...this huge increase hasn’t stopped investors from putting more money into the asset class...and 8x more investors seeking to increase their allocation than decrease it.</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="263" src="https://lh3.googleusercontent.com/nNhz6TGDxjV2U3_p5AQBBthfGDX003-yeEgJNOntiJKfEydmdYY167nTsOjXDfcA7PQrvbIjSP2QwPe9NNhd2wTJIIhOtIv1jq9zVZuWkQe2tFKSyEP8liRNYupj_By100IdbuC0" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="325" /></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Despite two-thirds of the very same investors saying they are concerned about valuation. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="276" src="https://lh5.googleusercontent.com/shW1Ih09At5coZwnt82igcbojnyPU_7M57EoqiYkWXIluN8iNQGDt5zKMmIjRjyH20UBLoH63BRV9v5AjGSr0cDD-ID_WWGWpfq_YM4M9RZQHnjJrIGhmTj1awsjFXokXxzanrY2" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="341" /></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">What else should teachers expect, when the fund hires investment consultants </span><a href="http://www.umass.edu/preferen/You%20Must%20Read%20This/PickingWinners.pdf" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">with no evidence of success or value added</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> in picking winners.</span></div>
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<b style="font-weight: normal;"><br /></b></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">I am a big believer that past performance is not indicative of future returns. Knowledgeable people could argue the “real return” asset class, which is a hedge for spikes in inflation, is unloved after years of below trend inflation. This bucket also encompasses risk-parity, which has done relatively well, so it is unclear that this space is totally downtrodden. Regardless, as these charts show, few could argue that private equity is an under-owned, unloved asset class ripe for a contrarian, strategic allocation. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Even if there is opportunity in the PE space, the key to outperformance in alternatives is manager evaluation and selection. If you can’t get that right, and can’t minimize tracking error to something south of 4% per annum over a five year period, you need to step back and reconsider the basic foundation of your due diligence and manager selection strategy. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">We may be talking about Illinois, but I’m from Missouri on this one. Show me, guys. Show me where I’m wrong on expected returns for private equity and real return strategies at billion dollar sizes. Show me why we shouldn’t expect continued subpar performance. </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">And I said I would focus on performance, not fees…. but….ugh!! I just can’t help myself!! I have to throw this quote from the annual report: “TRS remained dedicated in FY16 to the prudent use of the System’s assets to administer required duties and activities on behalf of its members….Total expenses to manage the investment portfolio increased by 7.6 percent to $750 million, or 1.4 percent of all TRS assets.”</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Wow...I have no words. Well, maybe a few. Governor Rauner...call me!! </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="269" src="https://lh4.googleusercontent.com/BGqoxoGHyUKz4fdNI4SuncaOo2YQASC5uA7qFGWq8qFGTYkrhl5XgwgRdVv-ztXXmlytIW4KbTTNl1MELh1L8Ym01-HJijShHghbswoW8fhK598n1Dw7NVAstVi4MA2UKYiRCQIw" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="467" /></span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Governor...together, we can do this. Call me. Let’s do lunch. To illustrate the new low cost culture, it will be </span><a href="http://www.portillos.com/index.html" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Portillo’s</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">, not sushi. </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Let’s summarize. Illinois TRS wants to increase long-term returns with: </span></div>
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<b style="font-weight: normal;"><br /></b></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">1) more risk, 2) less liquidity, and 3) higher fees…in a fund with a 1) 10 year history of underperformance, 2) fiscal black hole and 3) a morbidly obese pot of fees. </span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">This reminds me of some good advice. “Don’t just do something, stand there!!” </span></div>
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<b style="font-weight: normal;"><br /></b></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Illinois TRS, I beg of you...for the good of your hard working teachers and pensioners: Don’t increase risk, sacrifice liquidity, and pay more in fees unless there is a demonstrable, high probability risk-adjusted pickup in long-term expected returns. The fund’s performance in the traditional equity and fixed income space has been ok-ish--roughly in line with benchmarks, and with materially less tracking error. The teachers and pensioners in Illinois--it is their money remember--would be far better off “standing there” in a global allocation to stock and bond indices that still exploits long-term risk premia, with </span><a href="http://www.cembenchmarking.com/Files/Documents/Research/Article_Illiquid_Assets.pdf" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">vastly superior liquidity</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">, and </span><a href="https://www.wsj.com/articles/private-equitys-hidden-fees-totaled-20-billion-1450051201" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">exponentially lower fees. </span></a></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Yes, the Illinois pension fund system is </span><a href="http://nprillinois.org/post/illinois-issues-next-pension-time-bomb-0#stream/0" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">a well publicized fiasco</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">. And they are most definitely </span><a href="https://trs.illinois.gov/press/financial.htm#mismanaged" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">playing the PR game with no lack of subterfuge</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">...These guys even have the audacity to quote </span><a href="http://trs.illinois.gov/investments/portfolio.htm" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">GROSS returns on their website</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> and claim they have outperformed, as if the $750 million they pay out in fees every year doesn’t count. That’s like a golfer that hits the ball on the green and calls every putt a gimme, then tells his friends he shot a 68.</span></div>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">This pension system has been dealt a bad hand by the state government shortchanging contributions over the years. Yet many other states that have the same problem have been generating returns in line or better than market benchmarks, and are adequately funded. At least they are good stewards of their clients’ money. In Illinois, the fund’s managers have even bigger problems and aren’t even doing their investing job right. What’s the definition of psychosis again? </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Literary: The act of doing the same thing over and over again and expecting a different result. </span></div>
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<li dir="ltr" style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; list-style-type: decimal; text-decoration: none; vertical-align: baseline;"><div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Psychology: </span><span style="background-color: white; color: #222222; font-family: "roboto"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">a severe mental disorder in which thought and emotions are so impaired that contact is lost with external reality.</span></div>
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<span style="background-color: white; color: #222222; font-family: "roboto"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Both sound about right in Illinois. </span><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> </span></div>
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<br />
Shawn<br />
<a href="mailto:TeamMacroMan2@gmail.com">TeamMacroMan2@gmail.com</a><br />
<a href="https://twitter.com/EMinflationista" target="_blank">@EMInflationista</a></div>
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EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com3tag:blogger.com,1999:blog-34323687.post-42700854137284611132017-07-06T07:02:00.006+01:002017-07-06T21:43:41.697+01:00Inflation Pressures Building Behind JPY? Readers SurveyWe've been talking about the Fed potentially becoming progressively more hawkish (maybe at the most inopportune time). This has started to materialize. In addition, subsequent central banks around the world (ECB, BOE, BOC) are echoing the same rhetoric.<br />
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We are currently witnessing<b style="font-style: italic;"> a reflexive process unwind.</b> <b style="font-style: italic;">When countries were engaged in a currency war racing to devalue, one central bank devaluing their currency would in turn indirectly force a relative tightening of financial conditions of another country. In turn, the second country would have to ease monetary conditions, creating a positive feedback loop. </b><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi3yFY9M21ED-oS8_v9llpUfkAXZrmG_VJzhG0AYFS5BQ2-eXaHAEL2QPyo6glGcdGR8IgnYx_X7kiKsZLWF99Fae4ycYzYPnqwyfdsSHSBOnev7_XX8xKrr5k0GboiKKPBDC0I/s1600/20170706+Currency+War.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="720" data-original-width="720" height="400" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi3yFY9M21ED-oS8_v9llpUfkAXZrmG_VJzhG0AYFS5BQ2-eXaHAEL2QPyo6glGcdGR8IgnYx_X7kiKsZLWF99Fae4ycYzYPnqwyfdsSHSBOnev7_XX8xKrr5k0GboiKKPBDC0I/s400/20170706+Currency+War.jpg" width="400" /></a></div>
Now, we are on <b><i>the other side, where central banks have realized that financial conditions might be too loose and asset prices are noticeably overvalued.</i></b><br />
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So now what?<b> <i>We now have started an unwind of the reflexive process with a positive feedback loop in the other direction. One country raises rates attempting to tighten, thus making the financial conditions of the other countries relatively looser - as a result, the other countries must then be forced to tighten. </i></b><br />
<b><i><br /></i></b> Of these central banks, the one that has been less aggressive in tapering and hawkish sentiment has been the BOJ.<br />
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Is that "justified"?<br />
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Looking at the lagging data, one might answer yes. But as speculators, it's paramount to project into the future.<br />
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One of the most important triggers for higher inflation is the pressure behind rising wages that will propel core inflation. Looking at Japan, the number of job openings to applications is historically high.<br />
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That means there is a strong economy in Japan. With the decline in population in the country well documented as a force behind the country's deflation. It is less often argued that a declining population can eventually mean a labor shortage and thus wage inflation (companies have to pay more for the same level and amount of labor)<br />
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<img alt="" height="311" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgPhTXUBcHhu1TGHcCsfZO9T4GV1vZs3ZXL53yC28HlzFC8oXcVmc79puKPZCjvBe7TjwTOIPA2INMJ-qi7Ix8OAFDByS1bVnZxe40SrMfqPvy3lUWHddp0adc8dwEEwkxyP2em/" width="640" /><br />
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Historically speaking, the gap shown above in the late 60's and early 70's led to huge amounts of inflation. The same thing but on a more muted basis occurred in the early 2000's.<br />
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In the data above, there was the time in the 80's and early 90's when Japan experienced a rise in inflation that manifested in the real estate and stock bubbles. The eventual popping of the bubble caused large deflationary pressures that overwhelmed any potential gains in inflation then.<br />
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Then we have the early 2000's when inflation returned in Japan as they seemed to have finally started to fight off the deflationary bogeyman before 2008 threw a wrench of sorts into things.<br />
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Looking at CPI, there seems to be some bottoming of CPI as it's started to pick up. One can also check the historical prints to reference my allusions earlier.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEilJGiC4os7ppmIDdhR-xDMcOKPRUnn0Mj9s_9qbqfBtqYezk20aGs9ZzSl8cXN1ZH-zRY5WGtOT9pqyopbp6cpGpkvEuZyWvKKCQokNz5kC4p4bWM4yrQshnzzNdQrd6RK_fok/s1600/20170706+Japan+CPI+Historical.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="961" data-original-width="1600" height="384" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEilJGiC4os7ppmIDdhR-xDMcOKPRUnn0Mj9s_9qbqfBtqYezk20aGs9ZzSl8cXN1ZH-zRY5WGtOT9pqyopbp6cpGpkvEuZyWvKKCQokNz5kC4p4bWM4yrQshnzzNdQrd6RK_fok/s640/20170706+Japan+CPI+Historical.JPG" width="640" /></a></div>
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Looking at the historical levels for JPY on a real basis. It seems to me that the currency is off the lows in regards to weakness in real terms (whether looking at it from a PPI or a CPI basis).<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjVtopS58DnpSPHwl24H3jz4PjwCxTJs-tjI-krs5O8eBzahNvwgx04NNOzLxI_ySt9KrMR5xxV69mogb4pwgBO4tzrgDvXyR_vRJiM0tdMuVnZ2hQJ9uKyK8D275njdpJ1vj9X/s1600/20170706+JPY+Real+Effective+Exchange+Rate.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="1200" data-original-width="1600" height="480" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjVtopS58DnpSPHwl24H3jz4PjwCxTJs-tjI-krs5O8eBzahNvwgx04NNOzLxI_ySt9KrMR5xxV69mogb4pwgBO4tzrgDvXyR_vRJiM0tdMuVnZ2hQJ9uKyK8D275njdpJ1vj9X/s640/20170706+JPY+Real+Effective+Exchange+Rate.JPG" width="640" /></a></div>
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Ultimately, with most of the developed world's currencies rapidly appreciating as a result of hawkish central banks trapped in a reflexive process of tightening, the one central bank that has been the least involved is Japan. That makes me want to go out and short the Yen against a number of currencies.<br />
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Additionally, the fundamental inflationary pressures in Japan would concur in the justification of a weaker yen.<br />
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Historically, the Yen has been a "safe haven currency" with flow into it when equity markets and risk sold off. It wasn't always so. The correlation back in 2011 between the SPX and Yen itself was actually positive.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjr_XlZ3RrxgBCFYc0mm4Y-AH5l5stV1Tkejs4txg_A5bWwpXll9Ebb5SSPtnFDaYnWpqBAQwMgAOJoozNRDm1aZHodXr3PCh-U7PiRSpBs-WpN5BRot9U25VeDt4ujcjpOvH-K/s1600/20170706+JPY+Return+vs+SPX+Return+Correlation+MA.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="1200" data-original-width="1600" height="480" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjr_XlZ3RrxgBCFYc0mm4Y-AH5l5stV1Tkejs4txg_A5bWwpXll9Ebb5SSPtnFDaYnWpqBAQwMgAOJoozNRDm1aZHodXr3PCh-U7PiRSpBs-WpN5BRot9U25VeDt4ujcjpOvH-K/s640/20170706+JPY+Return+vs+SPX+Return+Correlation+MA.JPG" width="640" /></a></div>
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I'm looking at the 50 period moving average to smooth out a 10 day return correlation between JPY futures and E-minis.<br />
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I am very interested to see if and when this correlation breaks down. With large negative delta in my portfolio towards equities and risk, I think shorting JPY is a good proxy hedge in case I am wrong. In addition, if that correlation of JPY outflow when risk sells off materializes, I will have even more conviction of a JPY short.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiJ9JuKgoFFzNRvZs8ZKQvEmi4niYQham7g4R8OOgnWSpZizdQ2RxNStOpHZTYbgvEb03e4oulQtZNFyUYkE-D4E32wLnbw9HIE05J72TI8l69zLZbEo5vvLzhxGmqN3rKF_UWG/s1600/2017076+USDJPY.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="473" data-original-width="1226" height="244" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiJ9JuKgoFFzNRvZs8ZKQvEmi4niYQham7g4R8OOgnWSpZizdQ2RxNStOpHZTYbgvEb03e4oulQtZNFyUYkE-D4E32wLnbw9HIE05J72TI8l69zLZbEo5vvLzhxGmqN3rKF_UWG/s640/2017076+USDJPY.JPG" width="640" /></a></div>
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The chart for the currency seems like it is setting up for a good entry point on the short side (long USDJPY) as well. I would look to buy it around now and hope to pick up some more around 111.50. Putting a stop at 109.<br />
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Positioning wise, using CFTC IMM positioning as an indicative, people are without a doubt short the Yen. With that said, the amount short is not nearly as extreme as in 2013 or in 2007 (read, trade is not that crowded yet).<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjaSnl5ujMagxgPVGoRobaAidRARWhurN9Gva9Z0huxhW9kKhNqPXtktsoTvD3u1uICDZxuQS_lcCz7RICjytHIy25uRBpdfopnUc48GiaRVCW4n-vaMgNV83eMC-gSAwmszYsz/s1600/20170706+JPY+Positioning.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="1200" data-original-width="1600" height="480" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjaSnl5ujMagxgPVGoRobaAidRARWhurN9Gva9Z0huxhW9kKhNqPXtktsoTvD3u1uICDZxuQS_lcCz7RICjytHIy25uRBpdfopnUc48GiaRVCW4n-vaMgNV83eMC-gSAwmszYsz/s640/20170706+JPY+Positioning.JPG" width="640" /></a></div>
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Readers, what are your thoughts on JPY amidst the current macroeconomic/financial market backdrop? Is it going to strengthen or weaken? Vote in the comment section below.<br />
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Thanks guys,<br />
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(DR)Macro Clownhttp://www.blogger.com/profile/17196568155114537578noreply@blogger.com9tag:blogger.com,1999:blog-34323687.post-66077871734829860462017-07-05T20:06:00.002+01:002018-04-14T01:40:37.914+01:00Yield. Hungry. Yield Hungry. <div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-family: "georgia" , "times new roman" , serif; font-size: large;"><span style="background-color: transparent; color: black; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">I’m learning to be more blogg-y and less deep dive-y...so a quick blurb on what caught my eye in this week’s Economist. I read it nearly cover-to-cover out at the lake over the long weekend--and while I would love to pontificate on </span><a href="https://www.economist.com/news/finance-and-economics/21724427-massive-chinese-projects-actually-exacerbate-some-them-pakistans-old-economic" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-style: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Pakistan and the IMF</span></a><span style="background-color: transparent; color: black; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">, the macro story of the week was in the excellent </span><a href="https://www.economist.com/news/finance-and-economics/21724404-nervous-hear-echoes-build-up-financial-crisis-alarm-grows-about" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-style: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Buttonwood column about the return of easy money</span></a><span style="background-color: transparent; color: black; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">. </span></span></div>
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<span style="font-family: "georgia" , "times new roman" , serif; font-size: large;"><br /></span></div>
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<span style="background-color: transparent; color: black; font-family: "georgia" , "times new roman" , serif; font-size: large; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">“Analysis by Moody’s shows that the proportion of the loan market that is “covenant-lite” (brilliant that it is the phony “lite” way) has risen from 27% in 2015 to over two-thirds today.”</span></div>
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<span style="background-color: transparent; color: black; font-family: "georgia" , "times new roman" , serif; font-size: large; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="395" src="https://lh3.googleusercontent.com/JnSdzPmY-nwpzyHaKZWje4tjspVu7gvXfJL50OTwOYoeP34_qJgu_BDU1dyh8XpCN_fOTZVPRr1WFyFzPqL-go5puB4ZdLN0jQnFOTyzETlQG7vxtVZhzXt_y6sT2dr4MOGSTXZi" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="384" /></span></div>
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<span style="font-family: "georgia" , "times new roman" , serif; font-size: large;"><br /></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "georgia" , "times new roman" , serif; font-size: large; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">We know investors are “yield hungry”. But what does that mean? Why are they so hungry? </span></div>
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<span style="font-family: "georgia" , "times new roman" , serif; font-size: large;"><br /></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-family: "georgia" , "times new roman" , serif; font-size: large;"><span style="background-color: transparent; color: black; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">I wouldn’t ask you to read </span><a href="https://www.strsoh.org/_pdfs/annualreports/investplans/2018_investplan.pdf" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-style: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">the investment plan of a standard issue US public pension fund</span></a><span style="background-color: transparent; color: black; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">, but if you did, you would read statements like this: </span></span></div>
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<span style="background-color: transparent; color: black; font-family: "georgia" , "times new roman" , serif; font-size: large; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="119" src="https://lh3.googleusercontent.com/077gvUOW3fzr9zxwcBmr13tNMskQ_-8SaUoEXFjzKWEoU_hTEgGuXZpL11BRqPV_6Cjr_ass9L2L0tACtpJtc-wjGuGmKvmBnSN2H3ced-hLX3IU8_RuQhcwLeXdvuDkJcgJPevH" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="624" /></span></div>
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<span style="font-family: "georgia" , "times new roman" , serif; font-size: large;"><br /></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "georgia" , "times new roman" , serif; font-size: large; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">This is about a $70bn fund--with a shortfall of $4bn per year. For round numbers lets call that a shortfall of 6% on AUM per year. The pension fund has a funding ratio of roughly 70%, which is certainly a long way from a margin of safety. Over time, the annual nut to crack is going to get bigger and bigger. </span></div>
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<span style="font-family: "georgia" , "times new roman" , serif; font-size: large;"><br /></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "georgia" , "times new roman" , serif; font-size: large; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">What’s the asset allocation plan that will increase liquidity while closing the funding gap? </span></div>
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<table border="1" cellpadding="0" cellspacing="0" dir="ltr" style="border-collapse: collapse; border: none; table-layout: fixed;"><colgroup><col width="157"></col><col width="100"></col><col width="100"></col></colgroup><tbody>
<tr style="height: 21px;"><td style="padding: 2px 3px 2px 3px; vertical-align: bottom;"></td><td data-sheets-value="{"1":2,"2":"Current"}" style="padding: 2px 3px; text-align: center; text-decoration-line: underline; vertical-align: bottom;"><span style="font-family: "georgia" , "times new roman" , serif; font-size: large;">Current</span></td><td data-sheets-value="{"1":2,"2":"New Target"}" style="padding: 2px 3px; text-align: center; text-decoration-line: underline; vertical-align: bottom;"><span style="font-family: "georgia" , "times new roman" , serif; font-size: large;">New Target</span></td></tr>
<tr style="height: 21px;"><td data-sheets-value="{"1":2,"2":"Cash"}" style="padding: 2px 3px 2px 3px; vertical-align: bottom;"><span style="font-family: "georgia" , "times new roman" , serif; font-size: large;">Cash</span></td><td data-sheets-numberformat="{"1":3,"2":"0%","3":1}" data-sheets-value="{"1":3,"3":0.02}" style="padding: 2px 3px 2px 3px; text-align: center; vertical-align: bottom;"><span style="font-family: "georgia" , "times new roman" , serif; font-size: large;">2%</span></td><td data-sheets-numberformat="{"1":3,"2":"0%","3":1}" data-sheets-value="{"1":3,"3":0.01}" style="padding: 2px 3px 2px 3px; text-align: center; vertical-align: bottom;"><span style="font-family: "georgia" , "times new roman" , serif; font-size: large;">1%</span></td></tr>
<tr style="height: 21px;"><td data-sheets-value="{"1":2,"2":"Equities"}" style="padding: 2px 3px 2px 3px; vertical-align: bottom;"><span style="font-family: "georgia" , "times new roman" , serif; font-size: large;">Equities</span></td><td data-sheets-numberformat="{"1":3,"2":"0%","3":1}" data-sheets-value="{"1":3,"3":0.65}" style="padding: 2px 3px 2px 3px; text-align: center; vertical-align: bottom;"><span style="font-family: "georgia" , "times new roman" , serif; font-size: large;">65%</span></td><td data-sheets-numberformat="{"1":3,"2":"0%","3":1}" data-sheets-value="{"1":3,"3":0.58}" style="padding: 2px 3px 2px 3px; text-align: center; vertical-align: bottom;"><span style="font-family: "georgia" , "times new roman" , serif; font-size: large;">58%</span></td></tr>
<tr style="height: 21px;"><td data-sheets-value="{"1":2,"2":"Fixed Income"}" style="padding: 2px 3px 2px 3px; vertical-align: bottom;"><span style="font-family: "georgia" , "times new roman" , serif; font-size: large;">Fixed Income</span></td><td data-sheets-numberformat="{"1":3,"2":"0%","3":1}" data-sheets-value="{"1":3,"3":0.16}" style="padding: 2px 3px 2px 3px; text-align: center; vertical-align: bottom;"><span style="font-family: "georgia" , "times new roman" , serif; font-size: large;">16%</span></td><td data-sheets-numberformat="{"1":3,"2":"0%","3":1}" data-sheets-value="{"1":3,"3":0.21}" style="padding: 2px 3px 2px 3px; text-align: center; vertical-align: bottom;"><span style="font-family: "georgia" , "times new roman" , serif; font-size: large;">21%</span></td></tr>
<tr style="height: 21px;"><td data-sheets-value="{"1":2,"2":"\u201cOpportunistic/Diversified\u201d"}" style="padding: 2px 3px 2px 3px; vertical-align: bottom;"><span style="font-family: "georgia" , "times new roman" , serif; font-size: large;">“Opportunistic/Diversified”</span></td><td data-sheets-numberformat="{"1":3,"2":"0%","3":1}" data-sheets-value="{"1":3,"3":0.07}" style="padding: 2px 3px 2px 3px; text-align: center; vertical-align: bottom;"><span style="font-family: "georgia" , "times new roman" , serif; font-size: large;">7%</span></td><td data-sheets-numberformat="{"1":3,"2":"0%","3":1}" data-sheets-value="{"1":3,"3":0.1}" style="padding: 2px 3px 2px 3px; text-align: center; vertical-align: bottom;"><span style="font-family: "georgia" , "times new roman" , serif; font-size: large;">10%</span></td></tr>
<tr style="height: 21px;"><td data-sheets-value="{"1":2,"2":"Real Estate"}" style="padding: 2px 3px 2px 3px; vertical-align: bottom;"><span style="font-family: "georgia" , "times new roman" , serif; font-size: large;">Real Estate</span></td><td data-sheets-numberformat="{"1":3,"2":"0%","3":1}" data-sheets-value="{"1":3,"3":0.1}" style="padding: 2px 3px 2px 3px; text-align: center; vertical-align: bottom;"><span style="font-family: "georgia" , "times new roman" , serif; font-size: large;">10%</span></td><td data-sheets-numberformat="{"1":3,"2":"0%","3":1}" data-sheets-value="{"1":3,"3":0.1}" style="padding: 2px 3px 2px 3px; text-align: center; vertical-align: bottom;"><span style="font-family: "georgia" , "times new roman" , serif; font-size: large;">10%</span></td></tr>
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<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="font-family: "georgia" , "times new roman" , serif; font-size: large;"><br /></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "georgia" , "times new roman" , serif; font-size: large; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">They need a greater return on assets to plug the funding hole, despite the current level of yields and spreads. But they need safety and liquidity as more and more baby boomers retire. The solution is to move a healthy chunk of dough out of equities and cash and into fixed income. </span></div>
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<span style="font-family: "georgia" , "times new roman" , serif; font-size: large;"><br /></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "georgia" , "times new roman" , serif; font-size: large; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Drilling into this fixed income bucket, this pension fund is planning to increase exposure to US treasuries in the short-term, the medium-term plan is to reduce UST exposure while increasing the overall fixed income allocation. </span></div>
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<span style="font-family: "georgia" , "times new roman" , serif; font-size: large;"><br /></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "georgia" , "times new roman" , serif; font-size: large; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">What does that mean? Less equity exposure. More non-UST fixed income exposure. More duration. More yield. More cov-lite loans. More risk. Feed me, Seymour. </span></div>
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<span style="font-family: "georgia" , "times new roman" , serif; font-size: large;"><br /></span></div>
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "georgia" , "times new roman" , serif; font-size: large; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">It is tough to blame the pension fund managers--it’s a sticky wicket. They know the politicians and markets have painted them into a corner. This is the best negotiable solution so long as changes to contributions or benefits are politically radioactive. And if I had to guess, this consultant, along with half a dozen others like them, has given this or similar advice to the vast majority of public US pension funds. </span></div>
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<span style="font-family: "georgia" , "times new roman" , serif; font-size: large;"><br /></span></div>
<span style="font-family: "georgia" , "times new roman" , serif; font-size: large;"><span id="docs-internal-guid-7f46d551-1420-cf87-c44b-284a3d4f9eb0"></span><br /></span>
<br />
<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: transparent; color: black; font-family: "georgia" , "times new roman" , serif; font-size: large; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">An old Mexican political proverb once said, “Energy reform will be done by candlelight.” While it didn’t turn out to be true of the Mexican energy sector, the metaphor might fit the US pension fund system if credit markets again hit the wall. </span><br />
<span style="background-color: transparent; color: black; font-family: "georgia" , "times new roman" , serif; font-size: large; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span>
<span style="background-color: transparent; color: black; font-family: "georgia" , "times new roman" , serif; font-size: large; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Shawn</span><br />
<span style="background-color: transparent; color: black; font-family: "georgia" , "times new roman" , serif; font-size: large; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><a href="mailto:TeamMacroMan2@gmail.com">TeamMacroMan2@gmail.com</a></span><br />
<span style="background-color: transparent; color: black; font-family: "georgia" , "times new roman" , serif; font-size: large; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><a href="https://twitter.com/EMinflationista" target="_blank">@EMInflationista</a></span></div>
EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com11tag:blogger.com,1999:blog-34323687.post-61126045169036718482017-06-30T01:13:00.005+01:002017-07-06T19:07:34.302+01:00Oh How The Market Turns*Disclaimer: I am really bad at putting out posts in a timely manner - I first started drafting this one Sunday night*<br />
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Back from vacation and a break from the financial markets. The world seems drastically different than where I left it two weeks ago. Still in a vacation mood, I wanted to take a break from the macro aspect of things and view the recent developments from a trader's perspective.<br />
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<i>A few quick hit points this post will explore </i><i>(looking at both market and economic stuff)</i><i>: </i><br />
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-Have a hunch that this market is topping out<br />
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-Seems like the Fed is hiking into a recession...<br />
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-Are we at a reversal for the rates move?<br />
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-There has been a divergence of gold and nominal rates<br />
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-Some portfolio house cleaning stuff<br />
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Let's get to it.<br />
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<i><br /></i> <i>Have a hunch that this market is topping out</i><br />
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I think most of us would agree - maybe even with Harry H included - that speculation and overvaluation have become pretty rampant in some assets in the last year or so, especially in recent months: FANG, cryptocurrencies, Canadian real estate, subprime auto loans, etc.<br />
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Cryptocurrencies, a form of speculation IMO, have clearly made a top for at least the time being.<br />
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FANG stocks had led the market on the way up. They will lead the market on the way done; and at this point, it's possible that the process has started.<br />
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Vehicle sales had been fueled by easy credit via the form of auto loans for years. However, recent prints show that this has started to peak.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEimSRGC7E2sK9I8Awzy7fYA5ktLlCfu8qws8T6-onFwJG6iY4o8vt5sfnYQNtXc9HbRDzZNaXKg8jxVnFM873y1U2M0NylTbBvflu2AwLWms7q1f6Zy_QTy_bLWuFrNe3nRHFg_/s1600/20170602+US+Auto+Sales.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="794" data-original-width="1600" height="315" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEimSRGC7E2sK9I8Awzy7fYA5ktLlCfu8qws8T6-onFwJG6iY4o8vt5sfnYQNtXc9HbRDzZNaXKg8jxVnFM873y1U2M0NylTbBvflu2AwLWms7q1f6Zy_QTy_bLWuFrNe3nRHFg_/s640/20170602+US+Auto+Sales.JPG" width="640" /></a></div>
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As a result, it felt to me that equities are getting a bit toppy to me - when futures opened gap down this past Sunday night. After Monday's price action by the close, I felt enough conviction to build a punt from the short side.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhH3ZUrvHLXDKhv_vX1RKzb1a-7Ihup7frU39k9s5FP0ChoftR3u5b_6MHuDZAb4wFLpawx8Zxl5ViCCXR8bYsrQTvwZ_v_jKN9qPTbGONSF8UwDmQ6rGabMBvn6QrwKEKTkP0_/s1600/20170627+Equity+World+Snapshot.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="474" data-original-width="1600" height="188" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhH3ZUrvHLXDKhv_vX1RKzb1a-7Ihup7frU39k9s5FP0ChoftR3u5b_6MHuDZAb4wFLpawx8Zxl5ViCCXR8bYsrQTvwZ_v_jKN9qPTbGONSF8UwDmQ6rGabMBvn6QrwKEKTkP0_/s640/20170627+Equity+World+Snapshot.JPG" width="640" /></a></div>
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I already have sizable <a href="http://macro-man.blogspot.com/2017/05/crude-realities.html"><span style="color: blue;">negative oil delta in the portfolio</span></a> - the fact that it's worked out thus far is yet another conviction in favor of recessionary pressures that might be just beyond the horizon. </div>
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To make things work, I covered a little bit of that short oil delta. Additionally, I was a receiver of the US long-end of the curve - exited that to make room for the short equities punt.</div>
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Call it trader instinct. Call it a blind shot in the dark. Just a hunch.</div>
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<i>Seems like the Fed is hiking into a recession...</i></div>
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Okay, so auto sales seem to be topping out - we've seen it in the chart above.</div>
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Commercial paper growth and credit, in general, seem to reflect that as well. </div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj09rnm-KlttGdlk3n7tMG96QfIrlwyvIxBY5u9W0Jum8r1kb_vV257Nt6SBuEV9l8PiCg5jkYJxbjmZuwtglyKQ2KuF32-h6mKTdYAKTe3vm9Hcy_WZZtpuAI2v9ddXm1Fden8/s1600/20170627+Credit+Decline.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="846" data-original-width="1195" height="452" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj09rnm-KlttGdlk3n7tMG96QfIrlwyvIxBY5u9W0Jum8r1kb_vV257Nt6SBuEV9l8PiCg5jkYJxbjmZuwtglyKQ2KuF32-h6mKTdYAKTe3vm9Hcy_WZZtpuAI2v9ddXm1Fden8/s640/20170627+Credit+Decline.JPG" width="640" /></a></div>
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Anyways, all this seems to be occurring as Yellen along with other central banks around the world (Draghi on Tuesday) are stepping up the rhetoric of tightening faster whether via hikes, balance sheet reduction or asset purchase tapering.</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjXQdP8oZ14nNhoQZlwocJqTOBq7Vp9qeaD8WGMuNbg6PsAchN9HBIIAbYkFxqb7bvhJEFYMmpSGHfu-Nf96lMcxz0rrf8-mdVMFyzFRojKhOennCdKaadDad2SmE51K1M8V3AH/s1600/20170629+US+Consumer+Credit.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="1200" data-original-width="1600" height="480" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjXQdP8oZ14nNhoQZlwocJqTOBq7Vp9qeaD8WGMuNbg6PsAchN9HBIIAbYkFxqb7bvhJEFYMmpSGHfu-Nf96lMcxz0rrf8-mdVMFyzFRojKhOennCdKaadDad2SmE51K1M8V3AH/s640/20170629+US+Consumer+Credit.JPG" width="640" /></a></div>
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Taking a look at US consumer credit, we've started to see a contraction - it is yet to be seen whether this contraction is an aberration or the beginning of a trend. However, with equity valuation where it is (current PE of 21+ and PB over 3), and the Fed tightening, we might finally have enough driving factors to push the stock market to the precipice. </div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh5EwK_8i3lVHPx4HeAaX2QSY5grWl-YTEpXF7yTZdjQ7MDhe9Dq6vSJLHgHioJelU_xkKSjqyVE9N0lQswRjDYLhg_xY8Vaujsyu65sM9Ob4ocv0Tc-q-kcSivNlprGgvyq9jR/s1600/20170629+Fed+Chicago+Financial+Conditions+vs+SPX.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="1200" data-original-width="1600" height="480" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh5EwK_8i3lVHPx4HeAaX2QSY5grWl-YTEpXF7yTZdjQ7MDhe9Dq6vSJLHgHioJelU_xkKSjqyVE9N0lQswRjDYLhg_xY8Vaujsyu65sM9Ob4ocv0Tc-q-kcSivNlprGgvyq9jR/s640/20170629+Fed+Chicago+Financial+Conditions+vs+SPX.JPG" width="640" /></a></div>
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We talked about potential drivers keeping down the VIX via <a href="http://macro-man.blogspot.com/2017/05/market-volatility-reports-of-my-death.html"><span style="color: blue;">indexing and beta funds that are vol targeted</span></a>. Is today's move in equities and the VIX enough to start the process of an unwind? We shall soon see.... </div>
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On Tuesday, we saw long end duration get slammed. Which leads to the next two points.</div>
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<i>Are we at a reversal for the rates move? </i>and <i>There has been a divergence of gold and nominal rates</i></div>
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Gold is more of a currency than a commodity. It trades off real rates of the specific currency that it's denominated in - so gold in US dollar terms usually trade off US real rates. </div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiqzQQ4pFHYdPv4BMHvbnZf3POOU3v54EDz_b4AFlKOm5QbvRU07zzBwULXm2dAMtXiefMAQNzDLuAhh-6EdLyds5hw36oo_kX9rpyL7-QFCEC4XuPZvGLpc00_DTkHl8q9H-nB/s1600/20170629+Real+Yield+vs+XAU.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em; text-align: center;"><img border="0" data-original-height="1200" data-original-width="1600" height="480" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiqzQQ4pFHYdPv4BMHvbnZf3POOU3v54EDz_b4AFlKOm5QbvRU07zzBwULXm2dAMtXiefMAQNzDLuAhh-6EdLyds5hw36oo_kX9rpyL7-QFCEC4XuPZvGLpc00_DTkHl8q9H-nB/s640/20170629+Real+Yield+vs+XAU.JPG" width="640" /></a></div>
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It was interesting that nominal rates and gold decoupled for a little while there. I no longer have a Bloomberg terminal handy, so I had to wait a couple of days before I had a chance to see this:</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiKDmDknty3cN7ZUWx074_82k2pSGxmw7wyEsrlamKN2dj5awGmwJ1yowS8SWk8-ZdNBv6YrQAZ3aYf6qeHd5CcOzFOj62iycD9ZoDVWkYRHp_4yODAwPcaY7UlzlKkucJupYSv/s1600/20170629+Nominals+vs+XAU.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em; text-align: center;"><img border="0" data-original-height="1200" data-original-width="1600" height="480" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiKDmDknty3cN7ZUWx074_82k2pSGxmw7wyEsrlamKN2dj5awGmwJ1yowS8SWk8-ZdNBv6YrQAZ3aYf6qeHd5CcOzFOj62iycD9ZoDVWkYRHp_4yODAwPcaY7UlzlKkucJupYSv/s640/20170629+Nominals+vs+XAU.JPG" width="640" /></a></div>
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Gold and real yield have been reacting to tighter financial conditions from Fed action and Fed talk as well as similar things from other central banks. Initially, nominals seem like they did not get the memo. </div>
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There was a notable/tradeable divergence between nominals and gold that started to close this week. Long end duration finally got the clue and sold off sharply this week, starting Tuesday - so sharply in fact that 2s10s actually steepened!</div>
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Another point of interest here is that the inverse correlation between US govie returns vs equity returns moved sharply positive this week. I know enough market history to know that back in the Paul Tudor Jones' Trader movie days, bonds and equities traded together in positive correlation instead of the current risk on/risk off regime we are in now. </div>
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Could this change in correlation lend credence to the idea that the Fed is tightening is hurting the equities market at a time of economic vulnerability? </div>
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True, the yield curve has flattened tremendously over the last couple of years but is still far from being inverted. But do keep in mind that an inverted yield curve is not necessary for a recession, and definitely not needed to spark a meaningful sell-off in spoos.</div>
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<i>Some portfolio house cleaning stuff</i></div>
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- The large negative oil delta I have in my portfolio has worked out well until this week. I still maintain my thesis that oil can go markedly lower from purely a production and OPEC market share view. Now that market participants might start anticipating for a recession, we can get a move from the demand concern side of things too. More conviction.</div>
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- US duration trade - closed the trade at the beginning of the week - saw this sell off coming. No strong convictions here but gun to my head, the curve continues to flatten but we get higher rates via an overall sell off along the whole curve.</div>
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- Took the money from US duration and some of the short oil profits and built a short tech equities punt at the EOD Monday. As you could've guessed, I'm feeling like Johnny Hekker today, aka LA Rams' pro bowl punter.</div>
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If we are indeed heading for a large correction/bear market, I expect another few percent lower here before a sharp rally in equities that will make a lower high. Then the real fun can begin. </div>
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Even if I'm wrong and we haven't top ticked, I feel like we are pretty damn close. (Believe it or not, I don't punt on Spoos often - I've actually been a Harry H type of passive investor from 2011 to 2016)</div>
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- CAD has been a mess for me. Fellow contributor Shawn made some really good points regarding Canada - <a href="http://macro-man.blogspot.com/2017/06/economist-riff-of-week-canada.html"><span style="color: blue;">check it out here</span></a>. I conceded the point in my own CAD post that the currency definitely looks undervalued in real terms, which was a concern. </div>
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The bubble is largely concentrated in a few cities and Poloz is stuck between a rock (letting the bubble run) and a hard place (raising rates which would hurt the economy). But the economy there is doing okay, so I'm going to take my losses and wait to see how Poloz reacts if and when the bubble pop. Maybe CAD depreciation would occur after he raises rates to pop the bubble first...</div>
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As far as HCG goes, apparently they did have Buffett on their Batphone speed-dial! Eh. Buffett is still a market participant - he can easily be wrong like any of us - he just gets some unbelievably good deals whenever he buys something. </div>
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Buffett essentially borrows at 0% and lends it out at 9% (fully secured I might add) and garners shares at $10/share when the stock was trading 50% higher. In one fell swoop, Buffett basically destroys any chance HCG has to be profitable by choking off their future cash flow. If I was a shareholder, I would fade this pop, because this investment isn't exactly bullish for the company going forward.</div>
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- EUR and GBP ripping - rate differentials had to catch up and we are seeing it now. Europe has been chronically underinvested over the past decade. We talked about this before too: <a href="http://macro-man.blogspot.com/2017/04/sunday-funday-french-election.html"><span style="color: blue;">here</span></a> and <a href="http://macro-man.blogspot.com/2017/03/carney-cable-guy.html"><span style="color: blue;">here</span></a>. If and when equities sell off meaningfully, I would be a buyer of Europe and in EM as well.</div>
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- Wheat! <a href="http://macro-man.blogspot.com/2017/03/where-are-my-mannersfood-for-thought.html"><span style="color: blue;">Don't say I didn't warn ya</span></a>. Wheat soybean ratio up 16%+ since March...Ripping almost as if there has been massive overplanting of beans and underplanting of wheat for years...oh wait. Wheat itself up 5% outright since March.</div>
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That's all I got for now. Can you believe the NYC business library only allow 1 hour sessions on the terminal? What a travesty!</div>
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Happy summer and 4th of July weekend! Good luck out there folks. </div>
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Macro Clownhttp://www.blogger.com/profile/17196568155114537578noreply@blogger.com22tag:blogger.com,1999:blog-34323687.post-50093232698619305452017-06-29T18:36:00.001+01:002018-04-14T01:46:19.167+01:00All Time Low for US Corporate ROE<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
<a href="https://ftalphaville.ft.com/2017/06/28/2190711/snap-av-us-corporate-return-on-equity-falls-to-new-low/" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">From Deutsche and FT Alphaville</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">....Hard to see how this chart is consistent with equities having an attractive return on capital at these levels.</span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="456" src="https://lh4.googleusercontent.com/Uv9RgcCSYVuf9RqX59qIz6xxVO5fMxzAuLdDsRFt2_-zl78EGVrE92soqSTt6e2nad-_IvyCZZg-f8M0A_HskFuIGN5uO-F9E8OQJrc8a6RUZycrZa3LBLiBMfMh7XjSCTre4B8r" style="-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);" width="590" /></span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: 14.6667px;">While it is not particularly relevant to this--it is an excellent illustration of how low vol has fallen that a 10-15bp back up in yields feels like a bond market earthquake.</span></span><br />
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span>
<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">And further updating the state of the world--looks like my injunction to </span><a href="http://macro-man.blogspot.com/2017/06/whats-going-on-in-eur.html" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">"listen to Draghi" and pay EUR 2y1y</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> was more timely and prescient that I could have hoped...and while I may have been wrong to be skeptical of </span><a href="https://www.wsj.com/articles/boc-gov-stephen-poloz-signals-july-rate-rise-in-play-1498652646" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Poloz and the BoC hiking next month</span></a><span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">, that and continued USD weakness has given CAD a nice bump. </span></div>
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<span style="background-color: transparent; color: black; font-family: "arial"; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><img height="441" src="https://lh4.googleusercontent.com/wbRcN49nczQaah8glx5d3KjOkdsGJLQtB34yNIaD20myRYCltjFYKM_PlpuluFD6-ZxEw3UgCbAcdWszUFk3yeheYUBDV9i5fj6oA7Ag8AtaYKlhttzriAWoF-I3ELymMjEf0hDR" style="border: none; transform: rotate(0rad);" width="575" /></span></div>
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Shawn<br />
<a href="mailto:TeamMacroMan2@gmail.com">TeamMacroMan2@gmail.com</a><br />
<a href="https://twitter.com/EMinflationista" target="_blank">@EMInflationista</a>EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com7tag:blogger.com,1999:blog-34323687.post-8755258485738211772017-06-27T04:47:00.000+01:002018-04-14T01:45:59.509+01:00¡Órale, Banxico! Mexico's Hiking Cycle is OverThey say if you don't say good things about yourself, nobody else will.<br />
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<span style="background-color: white; font-family: "arial"; font-size: 14.6667px; white-space: pre-wrap;">"Another 25bp hike at next week’s Banxico meeting looks baked in. The fundamentals argue that could be the end of the hiking cycle--usually that’s a good time to receive rates...</span><span style="font-family: "arial"; font-size: 14.6667px; white-space: pre-wrap;">Receive 2-5yr TIIE or buy 3--7yr Mbonos; curve is flat, but not yet pricing an easing cycle."</span> -<a href="http://macro-man.blogspot.com/2017/06/make-mbonos-great-again.html" target="_blank">"Make Mbonos Great Again"</a>, 6/15/16<br />
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"<span style="font-family: "arial"; font-size: 11pt; white-space: pre-wrap;">With the entire TIIE curve gravitating around the 7% level, we might see another 50bp move lower if the market buys into the easing cycle. </span><span style="font-family: "arial"; font-size: 11pt; white-space: pre-wrap;">The 2-5yr segment is the sweet spot of the curve, specifically the 1y rate, 2yrs fwd, which is hanging around 6.80%...<a href="http://macro-man.blogspot.com/2017/06/what-i-think-about-when-thinking-about.html" target="_blank">"What I Think About When I Think About Mexican Rates"</a>, 6/21/17</span><br />
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One week...one 25bp hike...<a href="http://www.banxico.org.mx/informacion-para-la-prensa/comunicados/politica-monetaria/boletines/%7B4D3FD115-F426-A11F-B249-B322FA619925%7D.pdf" target="_blank">one dovish Banxico statement</a>...rates 40bps lower, and 50bps in the 2y1y--the 2-3yr tenors outperformed, presumably on the assumption Banxico wouldn't be afraid to cut before the election, but that it will be "all systems go" once the election is over.<br />
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Shawn<br />
<a href="mailto:TeamMacroMan2@gmail.com">TeamMacroMan2@gmail.com</a><br />
<a href="https://twitter.com/EMinflationista" target="_blank">@EMInflationista</a><br />
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<img alt="Image result for banxico meme" height="299" src="https://encrypted-tbn0.gstatic.com/images?q=tbn:ANd9GcRXjzAK1oHI84ZJDyCIsQUh3I2-hxQnutPoHaDgq_GkaFsiPQkO" width="400" /><br />
<i>"With the resignation of Carstens at Banxico, is it time for us to panic?"</i><br />
<i>"Kent, I would say yes." </i><br />
<br />EM Inflationistahttp://www.blogger.com/profile/13376753485910252234noreply@blogger.com6