// API callback
showrecentpostswiththumbs({"version":"1.0","encoding":"UTF-8","feed":{"xmlns":"http://www.w3.org/2005/Atom","xmlns$openSearch":"http://a9.com/-/spec/opensearchrss/1.0/","xmlns$blogger":"http://schemas.google.com/blogger/2008","xmlns$georss":"http://www.georss.org/georss","xmlns$gd":"http://schemas.google.com/g/2005","xmlns$thr":"http://purl.org/syndication/thread/1.0","id":{"$t":"tag:blogger.com,1999:blog-34323687"},"updated":{"$t":"2021-11-29T12:19:12.230+00:00"},"category":[{"term":"Voldemort"},{"term":"Yen carry"},{"term":"Europe"},{"term":"inflation"},{"term":"China"},{"term":"Treasury"},{"term":"bubble"},{"term":"gold"},{"term":"Australia"},{"term":"BBC"},{"term":"Bund"},{"term":"Contacts for Team Macro Man"},{"term":"Emotional reporting"},{"term":"Equity"},{"term":"Fudge"},{"term":"Greece"},{"term":"Nissan"},{"term":"PMI"},{"term":"Temblors"},{"term":"babes"},{"term":"banks"},{"term":"electric cars"},{"term":"metals"},{"term":"negative gearing"},{"term":"oil"},{"term":"palladium"},{"term":"platinum"},{"term":"puerto rico"}],"title":{"type":"text","$t":"Macro Man"},"subtitle":{"type":"html","$t":""},"link":[{"rel":"http://schemas.google.com/g/2005#feed","type":"application/atom+xml","href":"http:\/\/macro-man.blogspot.com\/feeds\/posts\/default"},{"rel":"self","type":"application/atom+xml","href":"http:\/\/www.blogger.com\/feeds\/34323687\/posts\/default?alt=json-in-script\u0026orderby=published"},{"rel":"alternate","type":"text/html","href":"http:\/\/macro-man.blogspot.com\/"},{"rel":"hub","href":"http://pubsubhubbub.appspot.com/"},{"rel":"next","type":"application/atom+xml","href":"http:\/\/www.blogger.com\/feeds\/34323687\/posts\/default?alt=json-in-script\u0026start-index=26\u0026max-results=25\u0026orderby=published"}],"author":[{"name":{"$t":"Macro Man"},"uri":{"$t":"http:\/\/www.blogger.com\/profile\/12324967552369915949"},"email":{"$t":"noreply@blogger.com"},"gd$image":{"rel":"http://schemas.google.com/g/2005#thumbnail","width":"16","height":"16","src":"https:\/\/img1.blogblog.com\/img\/b16-rounded.gif"}}],"generator":{"version":"7.00","uri":"http://www.blogger.com","$t":"Blogger"},"openSearch$totalResults":{"$t":"2291"},"openSearch$startIndex":{"$t":"1"},"openSearch$itemsPerPage":{"$t":"25"},"entry":[{"id":{"$t":"tag:blogger.com,1999:blog-34323687.post-4711638373369577864"},"published":{"$t":"2019-09-29T15:21:00.002+01:00"},"updated":{"$t":"2019-09-29T15:22:06.345+01:00"},"title":{"type":"text","$t":"What Can Field of Dreams Teach Us About Corn And Trading Macro?"},"content":{"type":"html","$t":"\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003ELast 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.\u0026nbsp;\u003C\/span\u003E\u003C\/div\u003E\u003Cspan id=\"docs-internal-guid-0c553f9f-7fff-28b3-4f4a-c686a7b0afe4\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003EThey 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.\u0026nbsp;\u003C\/span\u003E\u003C\/div\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003EI 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?\u0026nbsp;\u003C\/span\u003E\u003C\/div\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Ca href=\"http:\/\/usda.mannlib.cornell.edu\/usda\/AgCensusImages\/1987\/01\/15\/3\/Table-51.pdf\" style=\"text-decoration-line: none;\"\u003E\u003Cspan style=\"color: #1155cc; font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003EIn 1987 many farms in Iowa were between 250-500 acres\u003C\/span\u003E\u003C\/a\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003E, 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.\u003C\/span\u003E\u003C\/div\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Ca href=\"https:\/\/www.card.iastate.edu\/farmland\/downloads\/\" style=\"text-decoration-line: none;\"\u003E\u003Cspan style=\"color: #1155cc; font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003EThe average value per acre in Iowa was $875 in 1987\u003C\/span\u003E\u003C\/a\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003E, 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.\u003C\/span\u003E\u003C\/div\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Ca href=\"https:\/\/www.extension.iastate.edu\/agdm\/crops\/pdf\/a2-11.pdf\" style=\"text-decoration-line: none;\"\u003E\u003Cspan style=\"color: #1155cc; font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003EThe average farm price for corn in 1987 was $1.89\/bushel\u003C\/span\u003E\u003C\/a\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003E. And one might expect an acre of corn to yield \u003C\/span\u003E\u003Ca href=\"https:\/\/www.cropprophet.com\/historical-state-grain-yields\/\" style=\"text-decoration-line: none;\"\u003E\u003Cspan style=\"color: #1155cc; font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003Earound 120 bushels of corn. \u003C\/span\u003E\u003C\/a\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u0026nbsp;\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"border: none; display: inline-block; height: 350px; overflow: hidden; width: 467px;\"\u003E\u003Cimg height=\"350\" src=\"https:\/\/lh3.googleusercontent.com\/--hbunG1i5OOUb0nzBpMGJGtxXOPBfVvZTVyLGtDrZsFs1_pcEgT3T6YJvzagtlEhelH6W6DXV6laLuYJhUOd8UBXap3HqE9EaKL5gY8kgtno8SnJ9O1y7aMM5Baqw4t_7-8TxVS\" style=\"margin-left: 0px; margin-top: 0px;\" width=\"467\" \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003ESo 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.\u0026nbsp; 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.\u0026nbsp; \u003C\/span\u003E\u003Ca href=\"https:\/\/www.cropprophet.com\/historical-state-grain-yields\/\" style=\"text-decoration-line: none;\"\u003E\u003Cspan style=\"color: #1155cc; font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003EBankruptcy was certainly on the mind of every US farmer\u003C\/span\u003E\u003C\/a\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003E in the mid-late 80s.\u0026nbsp;\u003C\/span\u003E\u003C\/div\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003ENow, what about this baseball field? \u003C\/span\u003E\u003Ca href=\"https:\/\/www.businessinsider.com\/chart-major-league-baseball-ballpark-sizes-2014-3\" style=\"text-decoration-line: none;\"\u003E\u003Cspan style=\"color: #1155cc; font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003EA major league baseball field is around 2.5 acres.\u003C\/span\u003E\u003C\/a\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u0026nbsp;\u003C\/span\u003E\u003C\/div\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"border: none; display: inline-block; height: 361px; overflow: hidden; width: 455px;\"\u003E\u003Cimg height=\"361\" src=\"https:\/\/lh4.googleusercontent.com\/cQeCtydWzhEED-G8iTK_hHKohNhhEw1WJwlq4GXYZxOOk_jg_egm7ZGXGZFH30W2HqTvdsC7_LB8mE6TqXn1LWd7VgthhanmmRZlCMAfUrRG_OdxD95L6rL2VY5lXtE692WgKGwJ\" style=\"margin-left: 0px; margin-top: 0px;\" width=\"455\" \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003EBut with foul territory and some residual space for bleachers, you’re probably looking at another acre. But \u003C\/span\u003E\u003Ca href=\"https:\/\/ballfields.com\/baseball-field-dimensions\/space-needs-of-a-ballfield\/\" style=\"text-decoration-line: none;\"\u003E\u003Cspan style=\"color: #1155cc; font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003Eno more than 4.5 acres total, even if you add in a few parking spaces.\u0026nbsp;\u003C\/span\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003ELet'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.\u0026nbsp;\u003C\/span\u003E\u003C\/div\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003ESo 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.\u0026nbsp; 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.\u0026nbsp;\u003C\/span\u003E\u003C\/div\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003EAn aggressive financial decision, but one easily justified by hearing a voice say, \u003C\/span\u003E\u003Ca href=\"https:\/\/www.youtube.com\/watch?v=NOPTByHw5RA\" style=\"text-decoration-line: none;\"\u003E\u003Cspan style=\"color: #1155cc; font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003E“If you build it, he will come.”\u003C\/span\u003E\u003C\/a\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u0026nbsp;\u003C\/span\u003E\u003C\/div\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003EKevin Costner made one crazy, totally unjustifiable decision: he lit the field!!\u0026nbsp;\u003C\/span\u003E\u003C\/div\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"border: none; display: inline-block; height: 168px; overflow: hidden; width: 299px;\"\u003E\u003Cimg height=\"168\" src=\"https:\/\/lh3.googleusercontent.com\/nvsn5nDxtVy6Lb-LZ5VN4ddzLGLnwyDUewHe6snVXVtBHimn347F3_7gENKTpcHKKR0YngDDca-cBZKW9b4ERDvveca0NiDrR2LVA7GYquAyewOcvyaAVWEZY0qRUctvgpBvr5XQ\" style=\"margin-left: 0px; margin-top: 0px;\" width=\"299\" \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003EThis, is what would have bankrupted his farm. This is the decision that would have had his smarmy brother-in-law questioning his sanity.\u0026nbsp; \u003C\/span\u003E\u003Ca href=\"https:\/\/www.razorlux.com\/how-much-do-baseball-field-lights-cost.html\" style=\"text-decoration-line: none;\"\u003E\u003Cspan style=\"color: #1155cc; font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003ELighting the field today would easily get you into six digits\u003C\/span\u003E\u003C\/a\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003E, and would certainly have been out of reach for a financially strapped family farmer in the midst of an agricultural crisis.\u003C\/span\u003E\u003C\/div\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003ESure, it made for the coolest scene in the movie.\u0026nbsp;\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"border: none; display: inline-block; height: 326px; overflow: hidden; width: 580px;\"\u003E\u003Cimg height=\"224\" src=\"https:\/\/lh6.googleusercontent.com\/7BM358rqvv5CGMYfipWtZipQ6nU8sZairsHVc24PDfIcI970H8JUKPJD2EGKg96QUxMQluWYt72tgeW8HfNRPQzvpGKCPHtzVQq0WfkOEPZU_xUjHqVoi9fThCwt0E9EcbMXse5Y\" style=\"margin-left: 0px; margin-top: 0px;\" width=\"400\" \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003EBut completely implausible.\u0026nbsp;\u0026nbsp;\u003C\/span\u003E\u003C\/div\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003EHere’s a few light-hearted takeaways for market analysis:\u0026nbsp;\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; font-weight: 700; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; font-weight: 700; vertical-align: baseline; white-space: pre-wrap;\"\u003EQuestion assumptions.\u003C\/span\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003E We all have a cognitive bias to buy into what we’re being told. It’s called \u003C\/span\u003E\u003Ca href=\"https:\/\/en.wikipedia.org\/wiki\/Truth-default_theory\" style=\"font-family: Arial; font-size: 11pt; text-decoration-line: none; white-space: pre;\"\u003E\u003Cspan style=\"color: #1155cc; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003E“Truth Default Theory”\u003C\/span\u003E\u003C\/a\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003E. It’s what makes movies work….but it often turns into a trap in markets.\u0026nbsp;\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; font-weight: 700; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; font-weight: 700; vertical-align: baseline; white-space: pre-wrap;\"\u003ESometimes the trade is not where you think. \u003C\/span\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003EEveryone jumped on Kevin Costner for digging up his corn--but it was the lights that were financially reckless.\u0026nbsp;\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; font-weight: 700; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; font-weight: 700; vertical-align: baseline; white-space: pre-wrap;\"\u003EEveryone loves a story.\u003C\/span\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u0026nbsp; 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.\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; font-weight: 700; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; font-weight: 700; vertical-align: baseline; white-space: pre-wrap;\"\u003EBut….every story needs data.\u0026nbsp; \u003C\/span\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003EStories without data are just that, Hollywood stories. A good story combined with solid data can go a long way.\u0026nbsp;\u003C\/span\u003E\u003C\/div\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003EBut most important:\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; font-weight: 700; vertical-align: baseline; white-space: pre-wrap;\"\u003EBe open to changing your mind.\u0026nbsp; \u003C\/span\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003EI 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.\u0026nbsp;\u003C\/span\u003E\u003C\/div\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003ELove your ideas, but don’t be afraid to set them free.\u0026nbsp;\u003C\/span\u003E\u003C\/div\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003C\/div\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"-webkit-text-stroke-width: 0px; color: black; font-style: normal; font-variant-caps: normal; font-variant-ligatures: normal; font-weight: 400; letter-spacing: normal; line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt; orphans: 2; text-align: start; text-decoration-color: initial; text-decoration-style: initial; text-indent: 0px; text-transform: none; widows: 2; word-spacing: 0px;\"\u003E\u003Cdiv style=\"font-family: \u0026quot;Times New Roman\u0026quot;; font-size: medium; margin: 0px; white-space: normal;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv style=\"margin: 0px;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;;\"\u003E\u003Cspan style=\"font-size: 14.6667px; white-space: pre-wrap;\"\u003E\u003Ca href=\"https:\/\/twitter.com\/EMinflationista\" target=\"_blank\"\u003E@EMInflationista\u003C\/a\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv style=\"margin: 0px;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;;\"\u003E\u003Cspan style=\"font-size: 14.6667px; white-space: pre-wrap;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003C\/div\u003E"},"link":[{"rel":"replies","type":"application/atom+xml","href":"http:\/\/macro-man.blogspot.com\/feeds\/4711638373369577864\/comments\/default","title":"Post Comments"},{"rel":"replies","type":"text/html","href":"http:\/\/www.blogger.com\/comment.g?blogID=34323687\u0026postID=4711638373369577864","title":"882 Comments"},{"rel":"edit","type":"application/atom+xml","href":"http:\/\/www.blogger.com\/feeds\/34323687\/posts\/default\/4711638373369577864"},{"rel":"self","type":"application/atom+xml","href":"http:\/\/www.blogger.com\/feeds\/34323687\/posts\/default\/4711638373369577864"},{"rel":"alternate","type":"text/html","href":"http:\/\/macro-man.blogspot.com\/2019\/09\/last-night-i-wasted-field-of-dreams.html","title":"What Can Field of Dreams Teach Us About Corn And Trading Macro?"}],"author":[{"name":{"$t":"EM Inflationista"},"uri":{"$t":"http:\/\/www.blogger.com\/profile\/13376753485910252234"},"email":{"$t":"noreply@blogger.com"},"gd$image":{"rel":"http://schemas.google.com/g/2005#thumbnail","width":"32","height":"32","src":"\/\/4.bp.blogspot.com\/-VK2YiYEkB_o\/XI79hGr3rAI\/AAAAAAAADcc\/k0TIRG0Uww8W0ywSOtL6xguQbzOzyOm7gCK4BGAYYCw\/s113\/brazil.jpg"}}],"media$thumbnail":{"xmlns$media":"http://search.yahoo.com/mrss/","url":"https:\/\/lh3.googleusercontent.com\/--hbunG1i5OOUb0nzBpMGJGtxXOPBfVvZTVyLGtDrZsFs1_pcEgT3T6YJvzagtlEhelH6W6DXV6laLuYJhUOd8UBXap3HqE9EaKL5gY8kgtno8SnJ9O1y7aMM5Baqw4t_7-8TxVS=s72-c","height":"72","width":"72"},"thr$total":{"$t":"882"}},{"id":{"$t":"tag:blogger.com,1999:blog-34323687.post-20625834045754174"},"published":{"$t":"2019-09-03T05:18:00.000+01:00"},"updated":{"$t":"2019-09-03T12:46:12.464+01:00"},"title":{"type":"text","$t":"Curve Flattening and Monetary Policy Effectiveness: Is It Different This Time? "},"content":{"type":"html","$t":"\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan 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;\"\u003E\u003Cspan style=\"border: none; display: inline-block; height: 288px; overflow: hidden; width: 512px;\"\u003E\u003Cspan style=\"font-family: \u0026quot;georgia\u0026quot; , \u0026quot;times new roman\u0026quot; , serif;\"\u003E\u003Cimg height=\"288\" src=\"https:\/\/lh5.googleusercontent.com\/2eC4dXG_gKCkKmtSROiPu_LBfAs6ZUtjDD1LkQuy650s39o8a6Mbrbca-SYMmUAHQezTpCanqyZn5fMcCZydThdhWdkANufUuiC4Ls0dRxYSoi-BoU48ijfQV9Orkwp-NgGUOd90\" style=\"margin-left: 0px; margin-top: 0px;\" width=\"512\" \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb id=\"docs-internal-guid-105a2850-7fff-8d90-2378-61c773f128af\" style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-family: \u0026quot;georgia\u0026quot; , \u0026quot;times new roman\u0026quot; , serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan 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;\"\u003E\u003Cspan style=\"font-family: \u0026quot;georgia\u0026quot; , \u0026quot;times new roman\u0026quot; , serif;\"\u003ENo 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.\u0026nbsp; I’ve gotten that one a few times lately.\u0026nbsp;\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-family: \u0026quot;georgia\u0026quot; , \u0026quot;times new roman\u0026quot; , serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan 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;\"\u003E\u003Cspan style=\"font-family: \u0026quot;georgia\u0026quot; , \u0026quot;times new roman\u0026quot; , serif;\"\u003EBut let's take that question at face value. Let’s put aside curve inversion for a moment.\u0026nbsp; What does a *flattening* yield curve mean for monetary policy and the economy?\u0026nbsp;\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-family: \u0026quot;georgia\u0026quot; , \u0026quot;times new roman\u0026quot; , serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan 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;\"\u003E\u003Cspan style=\"font-family: \u0026quot;georgia\u0026quot; , \u0026quot;times new roman\u0026quot; , serif;\"\u003EMohamed got me thinking about that question this afternoon:\u0026nbsp;\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-family: \u0026quot;georgia\u0026quot; , \u0026quot;times new roman\u0026quot; , serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan 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;\"\u003E\u003Cspan style=\"border: none; display: inline-block; height: 279px; overflow: hidden; width: 376px;\"\u003E\u003Cspan style=\"font-family: \u0026quot;georgia\u0026quot; , \u0026quot;times new roman\u0026quot; , serif;\"\u003E\u003Cimg height=\"279\" src=\"https:\/\/lh6.googleusercontent.com\/pSO8bfO33aeTo6j9LyAbk09uSpOM4MWEW3lVTrpAKKW3jJbdSyNMTYZhO4KyRsCZzWk12sF6YJCjTsEonispwDyKH98eWg1isaLUqov128ap39jfhAPJ6Jq-DHzolbzF7VqHY3SU\" style=\"margin-left: 0px; margin-top: 0px;\" width=\"376\" \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-family: \u0026quot;georgia\u0026quot; , \u0026quot;times new roman\u0026quot; , serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan 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;\"\u003E\u003Cspan style=\"font-family: \u0026quot;georgia\u0026quot; , \u0026quot;times new roman\u0026quot; , serif;\"\u003EThe 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:\u0026nbsp;\u0026nbsp;\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan 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;\"\u003E\u003Cspan style=\"border: none; display: inline-block; height: 249px; overflow: hidden; width: 624px;\"\u003E\u003Cspan style=\"font-family: \u0026quot;georgia\u0026quot; , \u0026quot;times new roman\u0026quot; , serif;\"\u003E\u003Cimg height=\"249\" src=\"https:\/\/lh3.googleusercontent.com\/npqeUBbp7Dwiy-b_XQF64Qez0C4qz0woGFxmzfuxuUPUJu0OftiD1UV37KCrYR1Cf1uqRUQcGEmW_khQHsGil0moNEHwd2j05IjUq6wMimENFUUF4gEiGVUNlSeFcMlrU3A9r5oz\" style=\"margin-left: 0px; margin-top: 0px;\" width=\"624\" \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-family: \u0026quot;georgia\u0026quot; , \u0026quot;times new roman\u0026quot; , serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan 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;\"\u003E\u003Cspan style=\"font-family: \u0026quot;georgia\u0026quot; , \u0026quot;times new roman\u0026quot; , serif;\"\u003EThe 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.\u0026nbsp;\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-family: \u0026quot;georgia\u0026quot; , \u0026quot;times new roman\u0026quot; , serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan 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;\"\u003E\u003Cspan style=\"font-family: \u0026quot;georgia\u0026quot; , \u0026quot;times new roman\u0026quot; , serif;\"\u003EFast 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.\u0026nbsp;\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-family: \u0026quot;georgia\u0026quot; , \u0026quot;times new roman\u0026quot; , serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan 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;\"\u003E\u003Cspan style=\"font-family: \u0026quot;georgia\u0026quot; , \u0026quot;times new roman\u0026quot; , serif;\"\u003EThe 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.\u0026nbsp;\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-family: \u0026quot;georgia\u0026quot; , \u0026quot;times new roman\u0026quot; , serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan 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;\"\u003E\u003Cspan style=\"font-family: \u0026quot;georgia\u0026quot; , \u0026quot;times new roman\u0026quot; , serif;\"\u003EWhere does that leave the ECB today? In a heap of trouble. They need to steepen the curve.\u0026nbsp;\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-family: \u0026quot;georgia\u0026quot; , \u0026quot;times new roman\u0026quot; , serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan 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;\"\u003E\u003Cspan style=\"font-family: \u0026quot;georgia\u0026quot; , \u0026quot;times new roman\u0026quot; , serif;\"\u003EAmong 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:\u0026nbsp;\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan 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;\"\u003E\u003Cspan style=\"border: none; display: inline-block; height: 293px; overflow: hidden; width: 475px;\"\u003E\u003Cspan style=\"font-family: \u0026quot;georgia\u0026quot; , \u0026quot;times new roman\u0026quot; , serif;\"\u003E\u003Cimg height=\"293\" src=\"https:\/\/lh6.googleusercontent.com\/agTcrKr8v_C0Z15dtKKlJefj37vQ8DiWg4AOqEMsIVcmQYqCasjoYukxSkgUa9P7xN7T6GWZRXNjy78TmDA2-_9EzUujHg1jpp_CN487uTl7G9W3IhCfUq3j8s1sGOSIiX9FIiCc\" style=\"margin-left: 0px; margin-top: 0px;\" title=\"Chart\" width=\"475\" \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan 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;\"\u003E\u003Cspan style=\"font-family: \u0026quot;georgia\u0026quot; , \u0026quot;times new roman\u0026quot; , serif;\"\u003ESources: Bloomberg, Federal Reserve Bank of St. Louis (FRED)\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-family: \u0026quot;georgia\u0026quot; , \u0026quot;times new roman\u0026quot; , serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan 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;\"\u003E\u003Cspan style=\"font-family: \u0026quot;georgia\u0026quot; , \u0026quot;times new roman\u0026quot; , serif;\"\u003EA 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.\u0026nbsp;\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-family: \u0026quot;georgia\u0026quot; , \u0026quot;times new roman\u0026quot; , serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan 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;\"\u003E\u003Cspan style=\"font-family: \u0026quot;georgia\u0026quot; , \u0026quot;times new roman\u0026quot; , serif;\"\u003EThe 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.\u0026nbsp;\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-family: \u0026quot;georgia\u0026quot; , \u0026quot;times new roman\u0026quot; , serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan 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;\"\u003E\u003Cspan style=\"font-family: \u0026quot;georgia\u0026quot; , \u0026quot;times new roman\u0026quot; , serif;\"\u003EThat would lead to an easing of fiscal policy--via issuing more long end bonds. That would give\u0026nbsp; Mohamed the supply he so desperately wants for his friends at Allianz.\u0026nbsp;\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-family: \u0026quot;georgia\u0026quot; , \u0026quot;times new roman\u0026quot; , serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan 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;\"\u003E\u003Cspan style=\"font-family: \u0026quot;georgia\u0026quot; , \u0026quot;times new roman\u0026quot; , serif;\"\u003ENow, let's contrast the situation in Europe with what we see in the US:\u0026nbsp;\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-family: \u0026quot;georgia\u0026quot; , \u0026quot;times new roman\u0026quot; , serif;\"\u003E\u003Cbr \/\u003E\u003Cbr \/\u003E\u003Cbr \/\u003E\u003Cbr \/\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan 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;\"\u003E\u003Cspan style=\"font-family: \u0026quot;georgia\u0026quot; , \u0026quot;times new roman\u0026quot; , serif;\"\u003EBy 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).\u0026nbsp;\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan 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;\"\u003E\u003Cspan style=\"border: none; display: inline-block; height: 360px; overflow: hidden; width: 624px;\"\u003E\u003Cspan style=\"font-family: \u0026quot;georgia\u0026quot; , \u0026quot;times new roman\u0026quot; , serif;\"\u003E\u003Cimg height=\"360\" src=\"https:\/\/lh6.googleusercontent.com\/xZB-JahbiNtyGB1k6qrHTfhgJS-NHdavk1mI81lL1GWFKyfrzIV3S5SsjN3DaeBQdXOtHuGUhTxZIXZT_pB020Dky39kJrWl0GbqPNBZ87nsd633_eU4foIM5jGcLOeVX6asvAX8\" style=\"margin-left: 0px; margin-top: 0px;\" width=\"624\" \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-family: \u0026quot;georgia\u0026quot; , \u0026quot;times new roman\u0026quot; , serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan 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;\"\u003E\u003Cspan style=\"font-family: \u0026quot;georgia\u0026quot; , \u0026quot;times new roman\u0026quot; , serif;\"\u003EThroughout 2008, the curve stayed steep...going over 200bps in mid 2009. The first round of QE\u0026nbsp;\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan 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;\"\u003E\u003Cspan style=\"font-family: \u0026quot;georgia\u0026quot; , \u0026quot;times new roman\u0026quot; , serif;\"\u003ESteepened the curve even more: 5y\/30y spread topped out at over 250bps in 2010.\u0026nbsp;\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-family: \u0026quot;georgia\u0026quot; , \u0026quot;times new roman\u0026quot; , serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan 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;\"\u003E\u003Cspan style=\"font-family: \u0026quot;georgia\u0026quot; , \u0026quot;times new roman\u0026quot; , serif;\"\u003EThat was very supportive for credit growth--which is one of monetary policy’s core transmission mechanisms.\u0026nbsp;\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-family: \u0026quot;georgia\u0026quot; , \u0026quot;times new roman\u0026quot; , serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan 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;\"\u003E\u003Cspan style=\"font-family: \u0026quot;georgia\u0026quot; , \u0026quot;times new roman\u0026quot; , serif;\"\u003ENow, looking at the situation today: here is the same chart, 5y\/30y ust spread and the fed funds rate.\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan 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;\"\u003E\u003Cspan style=\"border: none; display: inline-block; height: 360px; overflow: hidden; width: 624px;\"\u003E\u003Cspan style=\"font-family: \u0026quot;georgia\u0026quot; , \u0026quot;times new roman\u0026quot; , serif;\"\u003E\u003Cimg height=\"360\" src=\"https:\/\/lh6.googleusercontent.com\/WtcLfKkhBINa4qNYKLPs6cLPzb5jWoWTo9OCK31tm2uCt2xTb0f_mD4e3AXyG313KUBIXw3_v13TtQiaGLyEDeFBvbe24oliJppz-jqDM5NZAlR5TVvwakFCgWxEVzKA5Rx5hRdo\" style=\"margin-left: 0px; margin-top: 0px;\" width=\"624\" \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-family: \u0026quot;georgia\u0026quot; , \u0026quot;times new roman\u0026quot; , serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan 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;\"\u003E\u003Cspan style=\"font-family: \u0026quot;georgia\u0026quot; , \u0026quot;times new roman\u0026quot; , serif;\"\u003EThis time, the curve FLATTENED when the Fed started cutting rates.\u0026nbsp;\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-family: \u0026quot;georgia\u0026quot; , \u0026quot;times new roman\u0026quot; , serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan 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;\"\u003E\u003Cspan style=\"font-family: \u0026quot;georgia\u0026quot; , \u0026quot;times new roman\u0026quot; , serif;\"\u003EThe market is telling the fed and the ECB that they don’t believe the traditional monetary policy transmission mechanisms work anymore.\u0026nbsp;\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-family: \u0026quot;georgia\u0026quot; , \u0026quot;times new roman\u0026quot; , serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan 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;\"\u003E\u003Cspan style=\"font-family: \u0026quot;georgia\u0026quot; , \u0026quot;times new roman\u0026quot; , serif;\"\u003EDo 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\u0026nbsp; return growth to trend.\u0026nbsp;\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-family: \u0026quot;georgia\u0026quot; , \u0026quot;times new roman\u0026quot; , serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan 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;\"\u003E\u003Cspan style=\"font-family: \u0026quot;georgia\u0026quot; , \u0026quot;times new roman\u0026quot; , serif;\"\u003EMy 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.\u0026nbsp;\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cbr \/\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-family: \u0026quot;georgia\u0026quot; , \u0026quot;times new roman\u0026quot; , serif;\"\u003E\u003Cspan 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;\"\u003ENow, put on your behavioral finance hat. If you have skin in the game, ask yourself or your colleagues these types of questions: \u003C\/span\u003E\u003Cspan 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;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cul style=\"margin-bottom: 0; margin-top: 0;\"\u003E\u003Cli 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;\"\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan 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;\"\u003E\u003Cspan style=\"font-family: \u0026quot;georgia\u0026quot; , \u0026quot;times new roman\u0026quot; , serif;\"\u003EWhat is the probability the US and\/or European governments pass fiscal stimulus packages of at least 2%\/GDP per annum?\u0026nbsp;\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003C\/li\u003E\u003Cli 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;\"\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan 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;\"\u003E\u003Cspan style=\"font-family: \u0026quot;georgia\u0026quot; , \u0026quot;times new roman\u0026quot; , serif;\"\u003EWhat 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?\u0026nbsp;\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003C\/li\u003E\u003Cli 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;\"\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan 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;\"\u003E\u003Cspan style=\"font-family: \u0026quot;georgia\u0026quot; , \u0026quot;times new roman\u0026quot; , serif;\"\u003EHow 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?\u0026nbsp;\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003C\/li\u003E\u003Cli 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;\"\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan 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;\"\u003E\u003Cspan style=\"font-family: \u0026quot;georgia\u0026quot; , \u0026quot;times new roman\u0026quot; , serif;\"\u003ECurves have re-steepened in the past--prove to me why this time is different.\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003C\/li\u003E\u003C\/ul\u003E\u003Cspan style=\"font-family: \u0026quot;georgia\u0026quot; , \u0026quot;times new roman\u0026quot; , serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan 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;\"\u003E\u003Cspan style=\"font-family: \u0026quot;georgia\u0026quot; , \u0026quot;times new roman\u0026quot; , serif;\"\u003EThese 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.\u003C\/span\u003E\u003C\/span\u003E\u003Cbr \/\u003E\u003Cspan 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;\"\u003E\u003Cspan style=\"font-family: \u0026quot;georgia\u0026quot; , \u0026quot;times new roman\u0026quot; , serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003Cspan 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;\"\u003E\u003Cspan style=\"font-family: \u0026quot;georgia\u0026quot; , \u0026quot;times new roman\u0026quot; , serif;\"\u003Eskewrisk@gmail.com\u003C\/span\u003E\u003C\/span\u003E\u003Cbr \/\u003E\u003Cspan 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;\"\u003E\u003Cspan style=\"font-family: \u0026quot;georgia\u0026quot; , \u0026quot;times new roman\u0026quot; , serif;\"\u003E@EMinflationista\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E"},"link":[{"rel":"replies","type":"application/atom+xml","href":"http:\/\/macro-man.blogspot.com\/feeds\/20625834045754174\/comments\/default","title":"Post Comments"},{"rel":"replies","type":"text/html","href":"http:\/\/www.blogger.com\/comment.g?blogID=34323687\u0026postID=20625834045754174","title":"445 Comments"},{"rel":"edit","type":"application/atom+xml","href":"http:\/\/www.blogger.com\/feeds\/34323687\/posts\/default\/20625834045754174"},{"rel":"self","type":"application/atom+xml","href":"http:\/\/www.blogger.com\/feeds\/34323687\/posts\/default\/20625834045754174"},{"rel":"alternate","type":"text/html","href":"http:\/\/macro-man.blogspot.com\/2019\/09\/curve-flattening-and-monetary-policy_29.html","title":"Curve Flattening and Monetary Policy Effectiveness: Is It Different This Time? "}],"author":[{"name":{"$t":"EM Inflationista"},"uri":{"$t":"http:\/\/www.blogger.com\/profile\/13376753485910252234"},"email":{"$t":"noreply@blogger.com"},"gd$image":{"rel":"http://schemas.google.com/g/2005#thumbnail","width":"32","height":"32","src":"\/\/4.bp.blogspot.com\/-VK2YiYEkB_o\/XI79hGr3rAI\/AAAAAAAADcc\/k0TIRG0Uww8W0ywSOtL6xguQbzOzyOm7gCK4BGAYYCw\/s113\/brazil.jpg"}}],"media$thumbnail":{"xmlns$media":"http://search.yahoo.com/mrss/","url":"https:\/\/lh5.googleusercontent.com\/2eC4dXG_gKCkKmtSROiPu_LBfAs6ZUtjDD1LkQuy650s39o8a6Mbrbca-SYMmUAHQezTpCanqyZn5fMcCZydThdhWdkANufUuiC4Ls0dRxYSoi-BoU48ijfQV9Orkwp-NgGUOd90=s72-c","height":"72","width":"72"},"thr$total":{"$t":"445"}},{"id":{"$t":"tag:blogger.com,1999:blog-34323687.post-5487076554143723977"},"published":{"$t":"2019-08-29T05:07:00.001+01:00"},"updated":{"$t":"2019-08-30T03:31:55.043+01:00"},"title":{"type":"text","$t":"The Argentina Siren Song And Where Else It Is Sung"},"content":{"type":"html","$t":"\u003Cspan id=\"docs-internal-guid-f3d67889-7fff-f8f3-cfbd-652f7bb29cd0\"\u003E\u003C\/span\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan id=\"docs-internal-guid-f3d67889-7fff-f8f3-cfbd-652f7bb29cd0\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"border: none; display: inline-block; height: 309px; overflow: hidden; width: 411px;\"\u003E\u003Cimg height=\"309\" src=\"https:\/\/lh4.googleusercontent.com\/4AphZWtBznrJTcbi0dYRUrJn_s4wHvnWNCdsirZ-24sgEui64x1R9s_S2Z8YXeWG6D1xiVVr6KVQR8ivfZlENzfuEYyU0eubiqmrcQsLp-n6Jc6IFZ6bUdrERNeYptQpx73vVzms\" style=\"margin-left: 0px; margin-top: 0px;\" width=\"411\" \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cspan id=\"docs-internal-guid-f3d67889-7fff-f8f3-cfbd-652f7bb29cd0\"\u003E\u003C\/span\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan id=\"docs-internal-guid-f3d67889-7fff-f8f3-cfbd-652f7bb29cd0\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003EI’m back! After an extended leave of absence I’ve decided to start writing again.\u0026nbsp;\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cspan id=\"docs-internal-guid-f3d67889-7fff-f8f3-cfbd-652f7bb29cd0\"\u003E\u003C\/span\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan id=\"docs-internal-guid-f3d67889-7fff-f8f3-cfbd-652f7bb29cd0\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003ELet’s start with a story familiar to those that read MM in my first term: Argentina.\u0026nbsp;\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cspan id=\"docs-internal-guid-f3d67889-7fff-f8f3-cfbd-652f7bb29cd0\"\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003EThat 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.\u0026nbsp;\u0026nbsp;\u003C\/span\u003E\u003C\/div\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003EI’m not going to get into the economics or the various mistakes made by the current government and the IMF.\u0026nbsp;\u003C\/span\u003E\u003C\/div\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003ETake a step back and think about how we got here, and the investor psychology required to move headlong back into Argentine debt:\u0026nbsp;\u003C\/span\u003E\u003C\/div\u003E\u003Cul\u003E\u003Cli\u003E\u003Cspan id=\"docs-internal-guid-f3d67889-7fff-f8f3-cfbd-652f7bb29cd0\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; white-space: pre-wrap;\"\u003EOctober 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.\u0026nbsp;\u003C\/span\u003E\u003C\/span\u003E\u003C\/li\u003E\u003Cli\u003E\u003Cspan id=\"docs-internal-guid-f3d67889-7fff-f8f3-cfbd-652f7bb29cd0\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; white-space: pre-wrap;\"\u003EMacri 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.\u0026nbsp;\u003C\/span\u003E\u003C\/span\u003E\u003C\/li\u003E\u003Cli\u003E\u003Cspan id=\"docs-internal-guid-f3d67889-7fff-f8f3-cfbd-652f7bb29cd0\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; white-space: pre-wrap;\"\u003EThis 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.\u0026nbsp;\u003C\/span\u003E\u003C\/span\u003E\u003C\/li\u003E\u003Cli\u003E\u003Cspan id=\"docs-internal-guid-f3d67889-7fff-f8f3-cfbd-652f7bb29cd0\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; white-space: pre-wrap;\"\u003EMacri 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\u0026nbsp;\u003C\/span\u003E\u003C\/span\u003E\u003C\/li\u003E\u003Cli\u003E\u003Cspan id=\"docs-internal-guid-f3d67889-7fff-f8f3-cfbd-652f7bb29cd0\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; white-space: pre-wrap;\"\u003EInvestors rejoice and welcome Argentina back into the loving embrace of EM\u003C\/span\u003E\u003C\/span\u003E\u003C\/li\u003E\u003C\/ul\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003ENone of these really look like mistakes, do they?\u0026nbsp;\u003C\/span\u003E\u003C\/div\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003EIt 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.\u0026nbsp;\u003C\/span\u003E\u003C\/div\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003ELess than two years later, this is the chart on the Argentina 2021 bond...which traded at 110 in Q3-17:\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"border: none; display: inline-block; height: 375px; overflow: hidden; width: 624px;\"\u003E\u003Cimg height=\"375\" src=\"https:\/\/lh4.googleusercontent.com\/vqMR7e6cjk5Uw5pDRXwbgkcEqTpZ9OqmaBMjfjarfBVQVRgbf-28x9rfut_vQRYIY1i586IgEevNH7WFGGL-qROgKxLJZ5BbmxRlL1eHmaFYfSZx38F8YVlU8Um0EhK2viJs229K\" style=\"margin-left: 0px; margin-top: 0px;\" width=\"624\" \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003EThose arrows are supposed to end in a skull and crossbones.\u0026nbsp;\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"border: none; display: inline-block; height: 105px; overflow: hidden; width: 105px;\"\u003E\u003Cimg height=\"105\" src=\"https:\/\/lh5.googleusercontent.com\/c-zFGrnSAJN8hSqmN_ExUWvYEW0Hr6Cufjs828F0WI5M45a7obdm4BOVpcMfvHG4T1r6kM8f4D72OROlQhfdzyfChTeEMAuBmHnipGh8rG2Or6AUmi4B01OtE5wEBLJM5nCr3U75\" style=\"margin-left: 0px; margin-top: 0px;\" width=\"105\" \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003EThere, 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 \u003C\/span\u003E\u003Ca href=\"https:\/\/www.bloomberg.com\/news\/articles\/2019-08-28\/argentina-seeks-to-extend-debt-maturities-as-reserves-tumble\" style=\"text-decoration-line: none;\"\u003E\u003Cspan style=\"color: #1155cc; font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003Ewhy we’re already at this stage:\u0026nbsp;\u003C\/span\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"border: none; display: inline-block; height: 211px; overflow: hidden; width: 590px;\"\u003E\u003Cimg height=\"211\" src=\"https:\/\/lh5.googleusercontent.com\/UHH81FVoGPM3qewNNkob9TisozVuqA5r4nIGth0yd6EaIiaFX0cWMqI8ARV3GY3TTGIenGlCOG4Mc_gNnBvlFGlHYFrNV4BWXIzVuEExV5_ChMkhIR8EBb-_mK58nbY7joJJ7jMI\" style=\"margin-left: 0px; margin-top: 0px;\" width=\"590\" \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003EYou 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.\u0026nbsp;\u003C\/span\u003E\u003C\/div\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003EBut let's look back at the initial bullet points. Where did Macri go wrong?\u0026nbsp;\u003C\/span\u003E\u003C\/div\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003EI’d argue it was in the hiring of a ton of technocrats to run the economic program.\u0026nbsp;\u003C\/span\u003E\u003C\/div\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003EOne 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.\u0026nbsp;\u003C\/span\u003E\u003C\/div\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003EYep, 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…\u003C\/span\u003E\u003C\/div\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003EBefore 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.\u0026nbsp;\u003C\/span\u003E\u003C\/div\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u0026nbsp;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?\u0026nbsp;\u003C\/span\u003E\u003C\/div\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003ENo, instead foreign investors ate it up! This is a list of the top ten holders of the Argentina 2021:\u0026nbsp;\u003C\/span\u003E\u003C\/div\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"border: none; display: inline-block; height: 289px; overflow: hidden; width: 624px;\"\u003E\u003Cimg height=\"289\" src=\"https:\/\/lh4.googleusercontent.com\/VeoXrdMwfU5MrUI6YbidD-gJTnLkPsqDT4KRwDIbFthck8E7r0q9eqYkHEYRcUxeCL-0BmVARaTFAYHd3QC4714dcmvxYFc2MD0r0J157emYXscENJTFHs-kBDGECdq6syuAqCWe\" style=\"margin-left: 0px; margin-top: 0px;\" width=\"624\" \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003ESame chart for the argentina 2028 (the only one that is reducing is blackrock, and only because they updated their data already):\u0026nbsp;\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"border: none; display: inline-block; height: 395px; overflow: hidden; width: 624px;\"\u003E\u003Cimg height=\"395\" src=\"https:\/\/lh4.googleusercontent.com\/S4BE1hZXlLWelnklVMtCjOWsc6hHuac9EEm4V8X9TM13gQLahBdUaUyAxL0YDOVBSe9ZKrkOnnm0chmyxpTegZaF1snHManpgWMib2p-1H-gWgvc7k_H2Qrd7is42vbuF-Fq7iSK\" style=\"margin-left: 0px; margin-top: 0px;\" width=\"624\" \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003EReal 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.\u0026nbsp;\u003C\/span\u003E\u003C\/div\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003EThey 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.”\u003C\/span\u003E\u003C\/div\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003EThere 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?\u0026nbsp;\u003C\/span\u003E\u003C\/div\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003EAnd 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.\u0026nbsp;\u003C\/span\u003E\u003C\/div\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003EYet 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.\u0026nbsp;\u003C\/span\u003E\u003C\/div\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003ERight until he lost big.\u0026nbsp;\u003C\/span\u003E\u003C\/div\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; vertical-align: baseline; white-space: pre-wrap;\"\u003EAnd 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?\u0026nbsp;\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cbr \/\u003E\u003C\/div\u003E\u003Cul\u003E\u003Cli\u003E\u003Cspan id=\"docs-internal-guid-f3d67889-7fff-f8f3-cfbd-652f7bb29cd0\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; white-space: pre-wrap;\"\u003EBrazil: sing it to me Captain...pension reform….deregulation….but growth still sucks and the government is still drowning in debt and red tape\u003C\/span\u003E\u003C\/span\u003E\u003C\/li\u003E\u003Cli\u003E\u003Cspan id=\"docs-internal-guid-f3d67889-7fff-f8f3-cfbd-652f7bb29cd0\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; white-space: pre-wrap;\"\u003EItaly: 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?\u0026nbsp;\u003C\/span\u003E\u003C\/span\u003E\u003C\/li\u003E\u003Cli\u003E\u003Cspan id=\"docs-internal-guid-f3d67889-7fff-f8f3-cfbd-652f7bb29cd0\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; white-space: pre-wrap;\"\u003EUK: Maybe Boris can pull it off. Or maybe people still believe he can.\u0026nbsp;\u003C\/span\u003E\u003C\/span\u003E\u003C\/li\u003E\u003Cli\u003E\u003Cspan id=\"docs-internal-guid-f3d67889-7fff-f8f3-cfbd-652f7bb29cd0\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: 11pt; white-space: pre-wrap;\"\u003EUnited States: I can think of one good scenario going into the 2020 election, but it involves Joe Biden. With the S\u0026amp;P 4% off the highs, investors believe the most beautiful song is still sung by US multinationals.\u0026nbsp;\u003C\/span\u003E\u003C\/span\u003E\u003C\/li\u003E\u003C\/ul\u003E\u003Cdiv\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;;\"\u003E\u003Cspan style=\"font-size: 14.6667px; white-space: pre-wrap;\"\u003EThis 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. \u003C\/span\u003E\u003C\/span\u003E\u003Cbr \/\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;;\"\u003E\u003Cspan style=\"font-size: 14.6667px; white-space: pre-wrap;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;;\"\u003E\u003Cspan style=\"font-size: 14.6667px; white-space: pre-wrap;\"\u003E\u003Ca href=\"https:\/\/twitter.com\/EMinflationista\" target=\"_blank\"\u003E@EMInflationista\u003C\/a\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003C\/span\u003E"},"link":[{"rel":"replies","type":"application/atom+xml","href":"http:\/\/macro-man.blogspot.com\/feeds\/5487076554143723977\/comments\/default","title":"Post Comments"},{"rel":"replies","type":"text/html","href":"http:\/\/www.blogger.com\/comment.g?blogID=34323687\u0026postID=5487076554143723977","title":"282 Comments"},{"rel":"edit","type":"application/atom+xml","href":"http:\/\/www.blogger.com\/feeds\/34323687\/posts\/default\/5487076554143723977"},{"rel":"self","type":"application/atom+xml","href":"http:\/\/www.blogger.com\/feeds\/34323687\/posts\/default\/5487076554143723977"},{"rel":"alternate","type":"text/html","href":"http:\/\/macro-man.blogspot.com\/2019\/08\/the-argentina-siren-song-and-where-else.html","title":"The Argentina Siren Song And Where Else It Is Sung"}],"author":[{"name":{"$t":"EM Inflationista"},"uri":{"$t":"http:\/\/www.blogger.com\/profile\/13376753485910252234"},"email":{"$t":"noreply@blogger.com"},"gd$image":{"rel":"http://schemas.google.com/g/2005#thumbnail","width":"32","height":"32","src":"\/\/4.bp.blogspot.com\/-VK2YiYEkB_o\/XI79hGr3rAI\/AAAAAAAADcc\/k0TIRG0Uww8W0ywSOtL6xguQbzOzyOm7gCK4BGAYYCw\/s113\/brazil.jpg"}}],"media$thumbnail":{"xmlns$media":"http://search.yahoo.com/mrss/","url":"https:\/\/lh4.googleusercontent.com\/4AphZWtBznrJTcbi0dYRUrJn_s4wHvnWNCdsirZ-24sgEui64x1R9s_S2Z8YXeWG6D1xiVVr6KVQR8ivfZlENzfuEYyU0eubiqmrcQsLp-n6Jc6IFZ6bUdrERNeYptQpx73vVzms=s72-c","height":"72","width":"72"},"thr$total":{"$t":"282"}},{"id":{"$t":"tag:blogger.com,1999:blog-34323687.post-5799988774465862030"},"published":{"$t":"2019-05-08T15:14:00.001+01:00"},"updated":{"$t":"2019-05-08T15:14:21.169+01:00"},"title":{"type":"text","$t":"Play nicely, please."},"content":{"type":"html","$t":"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.)"},"link":[{"rel":"replies","type":"application/atom+xml","href":"http:\/\/macro-man.blogspot.com\/feeds\/5799988774465862030\/comments\/default","title":"Post Comments"},{"rel":"replies","type":"text/html","href":"http:\/\/www.blogger.com\/comment.g?blogID=34323687\u0026postID=5799988774465862030","title":"257 Comments"},{"rel":"edit","type":"application/atom+xml","href":"http:\/\/www.blogger.com\/feeds\/34323687\/posts\/default\/5799988774465862030"},{"rel":"self","type":"application/atom+xml","href":"http:\/\/www.blogger.com\/feeds\/34323687\/posts\/default\/5799988774465862030"},{"rel":"alternate","type":"text/html","href":"http:\/\/macro-man.blogspot.com\/2019\/05\/play-nicely-please.html","title":"Play nicely, please."}],"author":[{"name":{"$t":"Macro Man"},"uri":{"$t":"http:\/\/www.blogger.com\/profile\/12324967552369915949"},"email":{"$t":"noreply@blogger.com"},"gd$image":{"rel":"http://schemas.google.com/g/2005#thumbnail","width":"16","height":"16","src":"https:\/\/img1.blogblog.com\/img\/b16-rounded.gif"}}],"thr$total":{"$t":"257"}},{"id":{"$t":"tag:blogger.com,1999:blog-34323687.post-4418682006203752763"},"published":{"$t":"2019-01-16T00:56:00.000+00:00"},"updated":{"$t":"2019-01-16T00:56:04.484+00:00"},"title":{"type":"text","$t":"Special Guest Post: PG\u0026E's Risk Management Fail"},"content":{"type":"html","$t":"\u003Cbr \/\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: left;\"\u003E\u003Cbr \/\u003E\u003C\/div\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: left;\"\u003EThere’s a saying that goes “mistakes are the tuition of learning”. The PG\u0026amp;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.\u003C\/div\u003E\u003Cdiv class=\"MsoNormal\"\u003E\u003Co:p\u003E\u003C\/o:p\u003E\u003C\/div\u003E\u003Cdiv class=\"MsoNormal\"\u003E\u003Cbr \/\u003E\u003C\/div\u003E\u003Cdiv class=\"MsoNormal\"\u003EA big story in the financial news lately is the significant liabilities incurred by Pacific Gas and Electric or PG\u0026amp;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. \u003Co:p\u003E\u003C\/o:p\u003E\u003C\/div\u003E\u003Cdiv class=\"MsoNormal\"\u003E\u003Cbr \/\u003E\u003C\/div\u003E\u003Cdiv class=\"MsoNormal\"\u003EGovernment 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\u0026amp;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,\u0026nbsp; \u003Ca href=\"https:\/\/www.bloomberg.com\/opinion\/articles\/2019-01-14\/money-stuff-pg-amp-e-pays-the-cost-of-fires\" target=\"_blank\"\u003Ecrushes the capital structure story.\u0026nbsp;\u003C\/a\u003E\u0026nbsp;Levine brilliantly points out that there weren't any secrets here....only a massive unfunded liability that had PG\u0026amp;E whistling past the graveyard for years...and certainly throughout 2018.\u0026nbsp;\u003Co:p\u003E\u003C\/o:p\u003E\u003C\/div\u003E\u003Cdiv class=\"MsoNormal\"\u003E\u003Cbr \/\u003E\u003C\/div\u003E\u003Cdiv class=\"MsoNormal\"\u003EPG\u0026amp;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?\u0026nbsp;\u003C\/div\u003E\u003Cdiv class=\"MsoNormal\"\u003E\u003Cbr \/\u003E\u003C\/div\u003E\u003Cdiv class=\"MsoNormal\"\u003ELet’s take a look at how a macro trader might have thought about the risk in PG\u0026amp;E stock.\u003Co:p\u003E\u003C\/o:p\u003E\u003C\/div\u003E\u003Cdiv class=\"MsoNormal\"\u003E\u003Cbr \/\u003E\u003C\/div\u003E\u003Cdiv class=\"MsoNormal\"\u003EHere 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. \u003Co:p\u003E\u003C\/o:p\u003E\u003C\/div\u003E\u003Cdiv class=\"MsoNormal\"\u003E\u003Cbr \/\u003E\u003C\/div\u003E\u003Cdiv class=\"MsoNormal\"\u003EPG\u0026amp;E Stock Price, 2004-2018\u003Co:p\u003E\u003C\/o:p\u003E\u003C\/div\u003E\u003Ca href=\"https:\/\/4.bp.blogspot.com\/-llOOYsV_jDQ\/XD59L6gtIgI\/AAAAAAAADX8\/tzHg-MPz1n4a39mdrvJ1REucNZKYhgAhQCLcBGAs\/s1600\/stock%2Bchart.jpg\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em; text-align: center;\"\u003E\u003Cimg border=\"0\" data-original-height=\"425\" data-original-width=\"1187\" height=\"227\" src=\"https:\/\/4.bp.blogspot.com\/-llOOYsV_jDQ\/XD59L6gtIgI\/AAAAAAAADX8\/tzHg-MPz1n4a39mdrvJ1REucNZKYhgAhQCLcBGAs\/s640\/stock%2Bchart.jpg\" width=\"640\" \/\u003E\u003C\/a\u003E\u003Cbr \/\u003E \u003Cdiv class=\"MsoNormal\"\u003E\u003Cb\u003E\u003Ci\u003ESource: Bloomberg\u003Co:p\u003E\u003C\/o:p\u003E\u003C\/i\u003E\u003C\/b\u003E\u003C\/div\u003E\u003Cdiv class=\"MsoNormal\"\u003E\u003Co:p\u003E\u0026nbsp;\u003C\/o:p\u003E\u0026nbsp;\u003C\/div\u003E\u003Cdiv class=\"MsoNormal\"\u003EThen in early 2017 a fire in northern California burned 36,000 acres and destroyed 5600 structures, including 2800 homes and killed 22 people.\u0026nbsp; The stock fell precipitously. The 1 week fall in the stock price was somewhat similar to what happened in the financial crisis.\u0026nbsp;\u0026nbsp;\u003C\/div\u003E\u003Cdiv class=\"MsoNormal\"\u003E\u003Cbr \/\u003E\u003C\/div\u003E\u003Cdiv class=\"MsoNormal\"\u003EAs a macro trader, how did you price fire risk before and after the 2017 fires?\u0026nbsp; \u003Co:p\u003E\u003C\/o:p\u003E\u003C\/div\u003E\u003Cdiv class=\"MsoNormal\"\u003E\u003Cbr \/\u003E\u003C\/div\u003E\u003Cdiv class=\"MsoNormal\"\u003EDid you have this quote in your back pocket as the risk manager? “\u003Cb\u003E\u003Cu\u003E\u003Cspan lang=\"EN\" style=\"mso-ansi-language: EN;\"\u003E“California law makes utilities responsible for any fire started by their equipment, even if they weren’t negligent.” \u0026nbsp;\u003C\/span\u003E\u003C\/u\u003E\u003C\/b\u003E\u003Cspan lang=\"EN\" style=\"mso-ansi-language: EN;\"\u003E\u0026nbsp;If you did, you might have forecasted a big loss, bigger than any drawdown in recent history--and certainly bigger than the PG\u0026amp;E liquid balance sheet-- based on the damage estimates of fires in recent history. \u003Cu\u003E\u003Co:p\u003E\u003C\/o:p\u003E\u003C\/u\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv class=\"MsoNormal\"\u003E\u003Cbr \/\u003E\u003C\/div\u003E\u003Cdiv class=\"MsoNormal\"\u003EBut as Donald Rumsfeld taught us, there are \"known knowns\" and unknown knowns, In 2017 the game changed….PG\u0026amp;E fire risk was a \"known known\".\u0026nbsp; \u003Ca href=\"https:\/\/www.epsilontheory.com\/harvey-weinstein-common-knowledge-game\/\" target=\"_blank\"\u003EBen Hunt at Epsilon Theory \u003C\/a\u003Emight say fire risk at PG\u0026amp;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.\u003C\/div\u003E\u003Cdiv class=\"MsoNormal\"\u003E\u003Co:p\u003E\u003C\/o:p\u003E\u003C\/div\u003E\u003Cdiv class=\"MsoNormal\"\u003E\u003Cbr \/\u003E\u003C\/div\u003E\u003Cdiv class=\"MsoNormal\"\u003EWhen 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\u0026amp;E was finished. But even then, it took a while before common knowledge caught up.\u0026nbsp;\u003C\/div\u003E\u003Cdiv class=\"MsoNormal\"\u003E\u003Cbr \/\u003E\u003C\/div\u003E\u003Cdiv class=\"MsoNormal\"\u003EYet 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\u0026amp;E’s credit risk in 5 year credit default swaps (CDS). \u0026nbsp;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\u0026nbsp; Bottom line, bond markets sniffed this out while equity markets pushed the stock 9% higher in 2018 before the fire on November 8. \u003Co:p\u003E\u003C\/o:p\u003E\u003C\/div\u003E\u003Cdiv class=\"MsoNormal\"\u003E\u0026nbsp;\u0026nbsp;\u003C\/div\u003E\u003Cdiv class=\"MsoNormal\"\u003E\u003Co:p\u003E\u003C\/o:p\u003E\u003C\/div\u003E\u003Cdiv class=\"MsoNormal\"\u003E\u003Cbr \/\u003E\u003C\/div\u003E\u003Cdiv class=\"MsoNormal\"\u003EPG\u0026amp;E 5y CDS\u003Co:p\u003E\u003C\/o:p\u003E\u003C\/div\u003E\u003Ca href=\"https:\/\/3.bp.blogspot.com\/-PIfwmiw-bhM\/XD59TFvUNGI\/AAAAAAAADYA\/rIlDQtODkLMMDMU2mBqxXsWiTs0qnAVCACLcBGAs\/s1600\/cds%2Bchart.jpg\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em; text-align: center;\"\u003E\u003Cimg border=\"0\" data-original-height=\"506\" data-original-width=\"1013\" height=\"318\" src=\"https:\/\/3.bp.blogspot.com\/-PIfwmiw-bhM\/XD59TFvUNGI\/AAAAAAAADYA\/rIlDQtODkLMMDMU2mBqxXsWiTs0qnAVCACLcBGAs\/s640\/cds%2Bchart.jpg\" width=\"640\" \/\u003E\u003C\/a\u003E\u003Cbr \/\u003E \u003Cdiv class=\"MsoNormal\"\u003E\u003Cb\u003E\u003Ci\u003ESource: Bloomberg\u003Co:p\u003E\u003C\/o:p\u003E\u003C\/i\u003E\u003C\/b\u003E\u003C\/div\u003E\u003Cdiv class=\"MsoNormal\"\u003E\u003Cbr \/\u003E\u003C\/div\u003E\u003Cdiv class=\"MsoNormal\"\u003EDo you think it was a coincidence that PG\u0026amp;E management did little to recapitalize the balance sheet for fire liabilities or commit to an extreme and fast maintenance\u0026nbsp;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?\u0026nbsp;\u003C\/div\u003E\u003Cdiv class=\"MsoNormal\"\u003E\u003Cbr \/\u003E\u003C\/div\u003E\u003Cdiv class=\"MsoNormal\"\u003EPG\u0026amp;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.\u0026nbsp;\u003C\/div\u003E\u003Cdiv class=\"MsoNormal\"\u003E\u003Co:p\u003E\u003C\/o:p\u003E\u003C\/div\u003E\u003Cbr \/\u003E\u003Cbr \/\u003E"},"link":[{"rel":"replies","type":"application/atom+xml","href":"http:\/\/macro-man.blogspot.com\/feeds\/4418682006203752763\/comments\/default","title":"Post Comments"},{"rel":"replies","type":"text/html","href":"http:\/\/www.blogger.com\/comment.g?blogID=34323687\u0026postID=4418682006203752763","title":"580 Comments"},{"rel":"edit","type":"application/atom+xml","href":"http:\/\/www.blogger.com\/feeds\/34323687\/posts\/default\/4418682006203752763"},{"rel":"self","type":"application/atom+xml","href":"http:\/\/www.blogger.com\/feeds\/34323687\/posts\/default\/4418682006203752763"},{"rel":"alternate","type":"text/html","href":"http:\/\/macro-man.blogspot.com\/2019\/01\/special-guest-post-pg-risk-management.html","title":"Special Guest Post: PG\u0026E's Risk Management Fail"}],"author":[{"name":{"$t":"EM Inflationista"},"uri":{"$t":"http:\/\/www.blogger.com\/profile\/13376753485910252234"},"email":{"$t":"noreply@blogger.com"},"gd$image":{"rel":"http://schemas.google.com/g/2005#thumbnail","width":"32","height":"32","src":"\/\/4.bp.blogspot.com\/-VK2YiYEkB_o\/XI79hGr3rAI\/AAAAAAAADcc\/k0TIRG0Uww8W0ywSOtL6xguQbzOzyOm7gCK4BGAYYCw\/s113\/brazil.jpg"}}],"media$thumbnail":{"xmlns$media":"http://search.yahoo.com/mrss/","url":"https:\/\/4.bp.blogspot.com\/-llOOYsV_jDQ\/XD59L6gtIgI\/AAAAAAAADX8\/tzHg-MPz1n4a39mdrvJ1REucNZKYhgAhQCLcBGAs\/s72-c\/stock%2Bchart.jpg","height":"72","width":"72"},"thr$total":{"$t":"580"}},{"id":{"$t":"tag:blogger.com,1999:blog-34323687.post-2573491036735069064"},"published":{"$t":"2018-10-18T16:43:00.000+01:00"},"updated":{"$t":"2018-10-18T16:43:13.990+01:00"},"title":{"type":"text","$t":"P\/E's are re-rating"},"content":{"type":"html","$t":"\u003Cdiv style=\"text-align: center;\"\u003EIts been a long time, we shouldn't of left you\u003C\/div\u003E\u003Cbr \/\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ciframe width=\"320\" height=\"266\" class=\"YOUTUBE-iframe-video\" data-thumbnail-src=\"https:\/\/i.ytimg.com\/vi\/U2S3o9yt-_0\/0.jpg\" src=\"https:\/\/www.youtube.com\/embed\/U2S3o9yt-_0?feature=player_embedded\" frameborder=\"0\" allowfullscreen\u003E\u003C\/iframe\u003E\u003C\/div\u003E\u003Cbr \/\u003E\u003Cbr \/\u003EWhile 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.\u003Cbr \/\u003E\u003Cbr \/\u003EWhile 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.\u003Cbr \/\u003E\u003Cbr \/\u003EOf 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.\u003Cbr \/\u003E\u003Cbr \/\u003EThe 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.\u003Cbr \/\u003E\u003Cbr \/\u003EThe 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.\u003Cbr \/\u003E\u003Cbr \/\u003EIf 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.\u003Cbr \/\u003E\u003Cbr \/\u003EBut lets turn to a few charts of the market P\/E and EPS, which combined give you the price.\u003Cbr \/\u003E\u003Cbr \/\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ca href=\"https:\/\/3.bp.blogspot.com\/-6OKmZlt1_sI\/W8impT3SbiI\/AAAAAAAAKvs\/vqnO-WbauCQf1WOlCs_c1H5Ryw_AuMRYgCLcBGAs\/s1600\/spxpe.png\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em;\"\u003E\u003Cimg border=\"0\" data-original-height=\"491\" data-original-width=\"869\" height=\"360\" src=\"https:\/\/3.bp.blogspot.com\/-6OKmZlt1_sI\/W8impT3SbiI\/AAAAAAAAKvs\/vqnO-WbauCQf1WOlCs_c1H5Ryw_AuMRYgCLcBGAs\/s640\/spxpe.png\" width=\"640\" \/\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Cbr \/\u003E\u003C\/div\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Cbr \/\u003E\u003C\/div\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: left;\"\u003EYou 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\u003C\/div\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: left;\"\u003E\u003Cbr \/\u003E\u003C\/div\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ca href=\"https:\/\/1.bp.blogspot.com\/-KQdw-OxDtsA\/W8in6MGwIOI\/AAAAAAAAKv4\/oOqj0vIagjs78IoI9przvKBfpwy--0U4wCLcBGAs\/s1600\/rtype.png\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em;\"\u003E\u003Cimg border=\"0\" data-original-height=\"491\" data-original-width=\"873\" height=\"358\" src=\"https:\/\/1.bp.blogspot.com\/-KQdw-OxDtsA\/W8in6MGwIOI\/AAAAAAAAKv4\/oOqj0vIagjs78IoI9przvKBfpwy--0U4wCLcBGAs\/s640\/rtype.png\" width=\"640\" \/\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: left;\"\u003E\u003Cbr \/\u003E\u003C\/div\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: left;\"\u003EWhile companies in the US may still be beating earning and buying back shares, its possible that investors re-rate regardless.\u0026nbsp;\u003C\/div\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ca href=\"https:\/\/3.bp.blogspot.com\/-qtPvZ41GYx4\/W8io5Bhwm1I\/AAAAAAAAKwE\/YkBeshi7xNk56MMdmtWPVAiYDxxXTWMZwCLcBGAs\/s1600\/daxpe.png\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em;\"\u003E\u003Cimg border=\"0\" data-original-height=\"491\" data-original-width=\"873\" height=\"358\" src=\"https:\/\/3.bp.blogspot.com\/-qtPvZ41GYx4\/W8io5Bhwm1I\/AAAAAAAAKwE\/YkBeshi7xNk56MMdmtWPVAiYDxxXTWMZwCLcBGAs\/s640\/daxpe.png\" width=\"640\" \/\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: left;\"\u003E\u003Cbr \/\u003E\u003C\/div\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: left;\"\u003E\u003Cbr \/\u003E\u003C\/div\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: left;\"\u003ENow 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.\u0026nbsp;\u003C\/div\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: left;\"\u003E\u003Cbr \/\u003E\u003C\/div\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: left;\"\u003E\u003Cbr \/\u003E\u003C\/div\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: left;\"\u003E\u003Cbr \/\u003E\u003C\/div\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: left;\"\u003E\u003Cbr \/\u003E\u003C\/div\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: left;\"\u003E\u003Cbr \/\u003E\u003C\/div\u003E\u003Cbr \/\u003E\u003Cbr \/\u003E"},"link":[{"rel":"replies","type":"application/atom+xml","href":"http:\/\/macro-man.blogspot.com\/feeds\/2573491036735069064\/comments\/default","title":"Post Comments"},{"rel":"replies","type":"text/html","href":"http:\/\/www.blogger.com\/comment.g?blogID=34323687\u0026postID=2573491036735069064","title":"561 Comments"},{"rel":"edit","type":"application/atom+xml","href":"http:\/\/www.blogger.com\/feeds\/34323687\/posts\/default\/2573491036735069064"},{"rel":"self","type":"application/atom+xml","href":"http:\/\/www.blogger.com\/feeds\/34323687\/posts\/default\/2573491036735069064"},{"rel":"alternate","type":"text/html","href":"http:\/\/macro-man.blogspot.com\/2018\/10\/pes-are-re-rating.html","title":"P\/E's are re-rating"}],"author":[{"name":{"$t":"abee crombie"},"uri":{"$t":"http:\/\/www.blogger.com\/profile\/13320039155613443039"},"email":{"$t":"noreply@blogger.com"},"gd$image":{"rel":"http://schemas.google.com/g/2005#thumbnail","width":"16","height":"16","src":"https:\/\/img1.blogblog.com\/img\/b16-rounded.gif"}}],"media$thumbnail":{"xmlns$media":"http://search.yahoo.com/mrss/","url":"https:\/\/img.youtube.com\/vi\/U2S3o9yt-_0\/default.jpg","height":"72","width":"72"},"thr$total":{"$t":"561"}},{"id":{"$t":"tag:blogger.com,1999:blog-34323687.post-4424521147664453978"},"published":{"$t":"2018-07-10T02:03:00.000+01:00"},"updated":{"$t":"2018-07-10T02:03:04.241+01:00"},"title":{"type":"text","$t":"SEK Sliding Away"},"content":{"type":"html","$t":"\u003Cspan style=\"font-family: Arial, Helvetica, sans-serif;\"\u003EOne 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.\u003C\/span\u003E\u003Cbr \/\u003E\u003Cspan style=\"font-family: Arial, Helvetica, sans-serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003Cspan style=\"font-family: Arial, Helvetica, sans-serif;\"\u003EUnfortunately 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.\u003C\/span\u003E\u003Cbr \/\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003C\/div\u003E\u003Cbr \/\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ca href=\"https:\/\/3.bp.blogspot.com\/-yGt8eKzG1Xs\/W0P37NZxCZI\/AAAAAAAAAGQ\/w7iaT3tuUXcP6tDGTWxZfe4OmO06jOILQCLcBGAs\/s1600\/SEK%2B7.png\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em;\"\u003E\u003Cspan style=\"font-family: Arial, Helvetica, sans-serif;\"\u003E\u003Cimg border=\"0\" data-original-height=\"339\" data-original-width=\"686\" height=\"316\" src=\"https:\/\/3.bp.blogspot.com\/-yGt8eKzG1Xs\/W0P37NZxCZI\/AAAAAAAAAGQ\/w7iaT3tuUXcP6tDGTWxZfe4OmO06jOILQCLcBGAs\/s640\/SEK%2B7.png\" width=\"640\" \/\u003E\u003C\/span\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: left;\"\u003E\u003Cspan style=\"font-family: Arial, Helvetica, sans-serif;\"\u003EAnother 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.\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003C\/div\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003C\/div\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ca href=\"https:\/\/4.bp.blogspot.com\/-JTYZNZv_8zs\/W0P4yQ4hfeI\/AAAAAAAAAGg\/7eisIKF7oCcsvHCClOcyTfVCX1HhTQ9mACLcBGAs\/s1600\/SEK%2B9.png\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em;\"\u003E\u003Cspan style=\"font-family: Arial, Helvetica, sans-serif;\"\u003E\u003Cimg border=\"0\" data-original-height=\"332\" data-original-width=\"712\" height=\"298\" src=\"https:\/\/4.bp.blogspot.com\/-JTYZNZv_8zs\/W0P4yQ4hfeI\/AAAAAAAAAGg\/7eisIKF7oCcsvHCClOcyTfVCX1HhTQ9mACLcBGAs\/s640\/SEK%2B9.png\" width=\"640\" \/\u003E\u003C\/span\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: left;\"\u003E\u003Cspan style=\"font-family: Arial, Helvetica, sans-serif;\"\u003EOf 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 \u003Ci\u003Every\u003C\/i\u003E\u0026nbsp;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.\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ca href=\"https:\/\/1.bp.blogspot.com\/-04-bAIkGaXo\/W0P3gNYEQvI\/AAAAAAAAAGE\/B-60IFOU9Jc5kTzEH4xgDLPw4kAZwqD1wCEwYBhgL\/s1600\/SEK%2B3.png\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em;\"\u003E\u003Cspan style=\"font-family: Arial, Helvetica, sans-serif;\"\u003E\u003Cimg border=\"0\" data-original-height=\"347\" data-original-width=\"704\" height=\"314\" src=\"https:\/\/1.bp.blogspot.com\/-04-bAIkGaXo\/W0P3gNYEQvI\/AAAAAAAAAGE\/B-60IFOU9Jc5kTzEH4xgDLPw4kAZwqD1wCEwYBhgL\/s640\/SEK%2B3.png\" width=\"640\" \/\u003E\u003C\/span\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: left;\"\u003E\u003Cspan style=\"font-family: Arial, Helvetica, sans-serif;\"\u003EWith 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 \u003Ci\u003Eopposite\u003C\/i\u003E\u0026nbsp;should happen: current account surpluses rising should lead to \u003Ci\u003Edepreciation\u003C\/i\u003E\u0026nbsp;rather than \u003Ci\u003Eappreciation\u003C\/i\u003E.\u0026nbsp;\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ca href=\"https:\/\/2.bp.blogspot.com\/-2iehVBFhhRQ\/W0P3gBj76yI\/AAAAAAAAAGM\/oY8VYX2fVOcaTZs66EZbDCuaK1ZlboqrQCEwYBhgL\/s1600\/SEK%2B4.png\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em;\"\u003E\u003Cspan style=\"font-family: Arial, Helvetica, sans-serif;\"\u003E\u003Cimg border=\"0\" data-original-height=\"347\" data-original-width=\"704\" height=\"314\" src=\"https:\/\/2.bp.blogspot.com\/-2iehVBFhhRQ\/W0P3gBj76yI\/AAAAAAAAAGM\/oY8VYX2fVOcaTZs66EZbDCuaK1ZlboqrQCEwYBhgL\/s640\/SEK%2B4.png\" width=\"640\" \/\u003E\u003C\/span\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: left;\"\u003E\u003Cspan style=\"font-family: Arial, Helvetica, sans-serif;\"\u003EOf 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.\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ca href=\"https:\/\/4.bp.blogspot.com\/-bc5BImEEd78\/W0P3gczGynI\/AAAAAAAAAGI\/5rZFS-C7WUUCkp8s-2UhVU-JJ7qNDR79wCEwYBhgL\/s1600\/SEK%2B5.png\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em;\"\u003E\u003Cspan style=\"font-family: Arial, Helvetica, sans-serif;\"\u003E\u003Cimg border=\"0\" data-original-height=\"347\" data-original-width=\"704\" height=\"314\" src=\"https:\/\/4.bp.blogspot.com\/-bc5BImEEd78\/W0P3gczGynI\/AAAAAAAAAGI\/5rZFS-C7WUUCkp8s-2UhVU-JJ7qNDR79wCEwYBhgL\/s640\/SEK%2B5.png\" width=\"640\" \/\u003E\u003C\/span\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: left;\"\u003E\u003Cspan style=\"font-family: Arial, Helvetica, sans-serif;\"\u003EFinally, 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.\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ca href=\"https:\/\/3.bp.blogspot.com\/-7oVvig9yblI\/W0P3g_XqjCI\/AAAAAAAAAGM\/K6IBPC2LC807Gre7dT3hVyRilBILXYIyACEwYBhgL\/s1600\/SEK%2B6.png\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em;\"\u003E\u003Cspan style=\"font-family: Arial, Helvetica, sans-serif;\"\u003E\u003Cimg border=\"0\" data-original-height=\"333\" data-original-width=\"721\" height=\"294\" src=\"https:\/\/3.bp.blogspot.com\/-7oVvig9yblI\/W0P3g_XqjCI\/AAAAAAAAAGM\/K6IBPC2LC807Gre7dT3hVyRilBILXYIyACEwYBhgL\/s640\/SEK%2B6.png\" width=\"640\" \/\u003E\u003C\/span\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: left;\"\u003E\u003Cspan style=\"font-family: Arial, Helvetica, sans-serif;\"\u003EAs 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.\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ca href=\"https:\/\/2.bp.blogspot.com\/-l1w8SeH6cfk\/W0QCJTDBadI\/AAAAAAAAAGw\/-Z-q_wBYE_IKzVUbN_NWe2yNymsUqL80wCLcBGAs\/s1600\/SEK%2B10.png\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em;\"\u003E\u003Cimg border=\"0\" data-original-height=\"382\" data-original-width=\"758\" height=\"322\" src=\"https:\/\/2.bp.blogspot.com\/-l1w8SeH6cfk\/W0QCJTDBadI\/AAAAAAAAAGw\/-Z-q_wBYE_IKzVUbN_NWe2yNymsUqL80wCLcBGAs\/s640\/SEK%2B10.png\" width=\"640\" \/\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: left;\"\u003E\u003Cspan style=\"font-family: Arial, Helvetica, sans-serif;\"\u003ETo 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.\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003C\/div\u003E"},"link":[{"rel":"replies","type":"application/atom+xml","href":"http:\/\/macro-man.blogspot.com\/feeds\/4424521147664453978\/comments\/default","title":"Post Comments"},{"rel":"replies","type":"text/html","href":"http:\/\/www.blogger.com\/comment.g?blogID=34323687\u0026postID=4424521147664453978","title":"710 Comments"},{"rel":"edit","type":"application/atom+xml","href":"http:\/\/www.blogger.com\/feeds\/34323687\/posts\/default\/4424521147664453978"},{"rel":"self","type":"application/atom+xml","href":"http:\/\/www.blogger.com\/feeds\/34323687\/posts\/default\/4424521147664453978"},{"rel":"alternate","type":"text/html","href":"http:\/\/macro-man.blogspot.com\/2018\/07\/sek-sliding-away.html","title":"SEK Sliding Away"}],"author":[{"name":{"$t":"Cackalack Capital"},"uri":{"$t":"http:\/\/www.blogger.com\/profile\/10765822411082053545"},"email":{"$t":"noreply@blogger.com"},"gd$image":{"rel":"http://schemas.google.com/g/2005#thumbnail","width":"16","height":"16","src":"https:\/\/img1.blogblog.com\/img\/b16-rounded.gif"}}],"media$thumbnail":{"xmlns$media":"http://search.yahoo.com/mrss/","url":"https:\/\/3.bp.blogspot.com\/-yGt8eKzG1Xs\/W0P37NZxCZI\/AAAAAAAAAGQ\/w7iaT3tuUXcP6tDGTWxZfe4OmO06jOILQCLcBGAs\/s72-c\/SEK%2B7.png","height":"72","width":"72"},"thr$total":{"$t":"710"}},{"id":{"$t":"tag:blogger.com,1999:blog-34323687.post-951481800884689441"},"published":{"$t":"2018-07-06T05:40:00.003+01:00"},"updated":{"$t":"2018-07-06T12:24:42.469+01:00"},"title":{"type":"text","$t":"Andres Manuel Lopez Obrador Explained for Investors in Mexico"},"content":{"type":"html","$t":"Greetings 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!\u003Cbr \/\u003E\u003Cbr \/\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ciframe allowfullscreen=\"\" class=\"YOUTUBE-iframe-video\" data-thumbnail-src=\"https:\/\/i.ytimg.com\/vi\/fQ4DyAJg6IY\/0.jpg\" frameborder=\"0\" height=\"266\" src=\"https:\/\/www.youtube.com\/embed\/fQ4DyAJg6IY?feature=player_embedded\" width=\"320\"\u003E\u003C\/iframe\u003E\u003C\/div\u003E\u003Cbr \/\u003EShawn\u003Cbr \/\u003E@EMInflationista"},"link":[{"rel":"replies","type":"application/atom+xml","href":"http:\/\/macro-man.blogspot.com\/feeds\/951481800884689441\/comments\/default","title":"Post Comments"},{"rel":"replies","type":"text/html","href":"http:\/\/www.blogger.com\/comment.g?blogID=34323687\u0026postID=951481800884689441","title":"57 Comments"},{"rel":"edit","type":"application/atom+xml","href":"http:\/\/www.blogger.com\/feeds\/34323687\/posts\/default\/951481800884689441"},{"rel":"self","type":"application/atom+xml","href":"http:\/\/www.blogger.com\/feeds\/34323687\/posts\/default\/951481800884689441"},{"rel":"alternate","type":"text/html","href":"http:\/\/macro-man.blogspot.com\/2018\/07\/andres-manuel-lopez-obrador-explained.html","title":"Andres Manuel Lopez Obrador Explained for Investors in Mexico"}],"author":[{"name":{"$t":"EM Inflationista"},"uri":{"$t":"http:\/\/www.blogger.com\/profile\/13376753485910252234"},"email":{"$t":"noreply@blogger.com"},"gd$image":{"rel":"http://schemas.google.com/g/2005#thumbnail","width":"32","height":"32","src":"\/\/4.bp.blogspot.com\/-VK2YiYEkB_o\/XI79hGr3rAI\/AAAAAAAADcc\/k0TIRG0Uww8W0ywSOtL6xguQbzOzyOm7gCK4BGAYYCw\/s113\/brazil.jpg"}}],"media$thumbnail":{"xmlns$media":"http://search.yahoo.com/mrss/","url":"https:\/\/img.youtube.com\/vi\/fQ4DyAJg6IY\/default.jpg","height":"72","width":"72"},"thr$total":{"$t":"57"}},{"id":{"$t":"tag:blogger.com,1999:blog-34323687.post-5937226404470404877"},"published":{"$t":"2018-05-29T09:00:00.000+01:00"},"updated":{"$t":"2018-05-29T09:00:00.134+01:00"},"title":{"type":"text","$t":"Supply-Side Crudenomics"},"content":{"type":"html","$t":"\u003Cspan style=\"font-family: arial, helvetica, sans-serif;\"\u003EWith 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 \"\u003C\/span\u003E\u003Ca href=\"https:\/\/www.blogger.com\/\" style=\"font-family: arial, helvetica, sans-serif;\"\u003E\u003Cspan id=\"goog_234877823\"\u003E\u003C\/span\u003Elower\u003Cspan id=\"goog_234877824\"\u003E\u003C\/span\u003E\u003C\/a\u003E\u003Cspan style=\"font-family: arial, helvetica, sans-serif;\"\u003E \u003C\/span\u003E\u003Ca 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;\"\u003Efor\u003C\/a\u003E\u003Cspan style=\"font-family: arial, helvetica, sans-serif;\"\u003E \u003C\/span\u003E\u003Ca href=\"http:\/\/fortune.com\/2018\/05\/28\/opec-russia-oil-prices-production-100\/\" style=\"font-family: arial, helvetica, sans-serif;\"\u003Elonger\u003C\/a\u003E\u003Cspan style=\"font-family: arial, helvetica, sans-serif;\"\u003E \u003C\/span\u003E\u003Ca href=\"https:\/\/qz.com\/1275211\/all-the-reasons-crude-oil-might-go-back-to-100-a-barrel\/\" style=\"font-family: arial, helvetica, sans-serif;\"\u003Eis\u003C\/a\u003E\u003Cspan style=\"font-family: arial, helvetica, sans-serif;\"\u003E \u003C\/span\u003E\u003Ca 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;\"\u003Edead\u003C\/a\u003E\u003Cspan style=\"font-family: arial, helvetica, sans-serif;\"\u003E\" analyses, crude has justifiably loomed large in the eyes of professionals the world over, even with lots of light and some heat in Turkey (\u003C\/span\u003E\u003Ca href=\"https:\/\/www.ft.com\/content\/fc3e85da-624a-11e8-a39d-4df188287fff\" style=\"font-family: arial, helvetica, sans-serif;\"\u003Ereforms\u003C\/a\u003E\u003Cspan style=\"font-family: arial, helvetica, sans-serif;\"\u003E to the CBRT's rate transmission mechanism), Italy (a technocratic \u003C\/span\u003E\u003Ca href=\"https:\/\/www.ft.com\/content\/940ad83e-6262-11e8-90c2-9563a0613e56\" style=\"font-family: arial, helvetica, sans-serif;\"\u003EPM choice\u003C\/a\u003E\u003Cspan style=\"font-family: arial, helvetica, sans-serif;\"\u003E from Mattarella that will most likely wind up with new elections), and Spain (Rajoy faces a \u003C\/span\u003E\u003Ca href=\"https:\/\/www.ft.com\/content\/9d91b30a-6262-11e8-a39d-4df188287fff\" style=\"font-family: arial, helvetica, sans-serif;\"\u003Eno-confidence vote\u003C\/a\u003E\u003Cspan style=\"font-family: arial, helvetica, sans-serif;\"\u003E which \u003C\/span\u003E\u003Ci style=\"font-family: arial, helvetica, sans-serif;\"\u003Emay\u003C\/i\u003E\u003Cspan style=\"font-family: arial, helvetica, sans-serif;\"\u003E\u0026nbsp;result in elections though that's TBD). As a side note, the Cackalack BTP \u003C\/span\u003E\u003Ca href=\"http:\/\/macro-man.blogspot.com\/2018\/05\/arm-me-with-carry-conte-drop-load-on.html\" style=\"font-family: arial, helvetica, sans-serif;\"\u003Eview\u003C\/a\u003E\u003Cspan style=\"font-family: arial, helvetica, sans-serif;\"\u003E 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.\u003C\/span\u003E\u003Cbr \/\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003EYour 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.\u003C\/span\u003E\u003Cbr \/\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003Cbr \/\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ca href=\"https:\/\/2.bp.blogspot.com\/-7YTgMuHMfRc\/Wwxz9Q7d7GI\/AAAAAAAAAEw\/GCyp7dpnMMwbEECFwkG8sDSKbvKD4nJ7gCLcBGAs\/s1600\/CL%2B12.png\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em;\"\u003E\u003Cimg border=\"0\" data-original-height=\"642\" data-original-width=\"927\" height=\"442\" src=\"https:\/\/2.bp.blogspot.com\/-7YTgMuHMfRc\/Wwxz9Q7d7GI\/AAAAAAAAAEw\/GCyp7dpnMMwbEECFwkG8sDSKbvKD4nJ7gCLcBGAs\/s640\/CL%2B12.png\" width=\"640\" \/\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003EBut 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.\u003C\/span\u003E\u003Cbr \/\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003EAs 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.\u003C\/span\u003E\u003Cbr \/\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003Cbr \/\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003C\/div\u003E\u003Cbr \/\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ca href=\"https:\/\/2.bp.blogspot.com\/-Coz8kA0UlOI\/Wwx08fkfdFI\/AAAAAAAAAE8\/U4b8pQr6lvMlJBt3S_3eW88tzxK79jHxACLcBGAs\/s1600\/CL%2B2.png\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em;\"\u003E\u003Cimg border=\"0\" data-original-height=\"324\" data-original-width=\"565\" src=\"https:\/\/2.bp.blogspot.com\/-Coz8kA0UlOI\/Wwx08fkfdFI\/AAAAAAAAAE8\/U4b8pQr6lvMlJBt3S_3eW88tzxK79jHxACLcBGAs\/s1600\/CL%2B2.png\" \/\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cbr \/\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003EIt'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.\u003C\/span\u003E\u003Cbr \/\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ca href=\"https:\/\/2.bp.blogspot.com\/-LeBZ2aqsQk8\/Wwx08akDXwI\/AAAAAAAAAFU\/DUO5sZPAv_8k2kgwQyeRAjXvV7zrcp01QCPcBGAYYCw\/s1600\/CL%2B3.png\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em;\"\u003E\u003Cimg border=\"0\" data-original-height=\"323\" data-original-width=\"554\" src=\"https:\/\/2.bp.blogspot.com\/-LeBZ2aqsQk8\/Wwx08akDXwI\/AAAAAAAAAFU\/DUO5sZPAv_8k2kgwQyeRAjXvV7zrcp01QCPcBGAYYCw\/s1600\/CL%2B3.png\" \/\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003Cspan style=\"font-family: arial, helvetica, sans-serif;\"\u003EThe 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.\u003C\/span\u003E\u003Cbr \/\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ca href=\"https:\/\/2.bp.blogspot.com\/-uJKlZAlLUDo\/Wwx08StunVI\/AAAAAAAAAFQ\/v6nZ6Y5cPBsUFyJfCnCVtZMGd74JZ2fWwCPcBGAYYCw\/s1600\/CL%2B4.png\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em;\"\u003E\u003Cimg border=\"0\" data-original-height=\"340\" data-original-width=\"550\" src=\"https:\/\/2.bp.blogspot.com\/-uJKlZAlLUDo\/Wwx08StunVI\/AAAAAAAAAFQ\/v6nZ6Y5cPBsUFyJfCnCVtZMGd74JZ2fWwCPcBGAYYCw\/s1600\/CL%2B4.png\" \/\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003Cspan style=\"font-family: arial, helvetica, sans-serif;\"\u003ESo 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.\u0026nbsp;\u003C\/span\u003E\u003Cbr \/\u003E\u003Cspan style=\"font-family: arial, helvetica, sans-serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ca href=\"https:\/\/4.bp.blogspot.com\/-jH68ynyOfOg\/Wwx08v-7q9I\/AAAAAAAAAFY\/MpNGNBjcYm05WJSTGBaHXMIye3-Ji5u2gCPcBGAYYCw\/s1600\/CL%2B5.png\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em;\"\u003E\u003Cimg border=\"0\" data-original-height=\"326\" data-original-width=\"545\" src=\"https:\/\/4.bp.blogspot.com\/-jH68ynyOfOg\/Wwx08v-7q9I\/AAAAAAAAAFY\/MpNGNBjcYm05WJSTGBaHXMIye3-Ji5u2gCPcBGAYYCw\/s1600\/CL%2B5.png\" \/\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cspan style=\"font-family: arial, helvetica, sans-serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003Cspan style=\"font-family: arial, helvetica, sans-serif;\"\u003ENow, calculating these elasticities is of course a tricky business and we'd be the first to say this is a \u003Ci\u003Every\u003C\/i\u003E 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.\u003C\/span\u003E\u003Cspan style=\"font-family: arial, helvetica, sans-serif;\"\u003E\u0026nbsp;\u003C\/span\u003E"},"link":[{"rel":"replies","type":"application/atom+xml","href":"http:\/\/macro-man.blogspot.com\/feeds\/5937226404470404877\/comments\/default","title":"Post Comments"},{"rel":"replies","type":"text/html","href":"http:\/\/www.blogger.com\/comment.g?blogID=34323687\u0026postID=5937226404470404877","title":"72 Comments"},{"rel":"edit","type":"application/atom+xml","href":"http:\/\/www.blogger.com\/feeds\/34323687\/posts\/default\/5937226404470404877"},{"rel":"self","type":"application/atom+xml","href":"http:\/\/www.blogger.com\/feeds\/34323687\/posts\/default\/5937226404470404877"},{"rel":"alternate","type":"text/html","href":"http:\/\/macro-man.blogspot.com\/2018\/05\/supply-side-crudenomics.html","title":"Supply-Side Crudenomics"}],"author":[{"name":{"$t":"Cackalack Capital"},"uri":{"$t":"http:\/\/www.blogger.com\/profile\/10765822411082053545"},"email":{"$t":"noreply@blogger.com"},"gd$image":{"rel":"http://schemas.google.com/g/2005#thumbnail","width":"16","height":"16","src":"https:\/\/img1.blogblog.com\/img\/b16-rounded.gif"}}],"media$thumbnail":{"xmlns$media":"http://search.yahoo.com/mrss/","url":"https:\/\/2.bp.blogspot.com\/-7YTgMuHMfRc\/Wwxz9Q7d7GI\/AAAAAAAAAEw\/GCyp7dpnMMwbEECFwkG8sDSKbvKD4nJ7gCLcBGAs\/s72-c\/CL%2B12.png","height":"72","width":"72"},"thr$total":{"$t":"72"}},{"id":{"$t":"tag:blogger.com,1999:blog-34323687.post-3025437403828975943"},"published":{"$t":"2018-05-22T02:22:00.000+01:00"},"updated":{"$t":"2018-05-22T11:17:05.528+01:00"},"title":{"type":"text","$t":"Arm Me With Carry, Conte Drop A Load On 'Em...BTP, How Can I Explain It?"},"content":{"type":"html","$t":"\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ca href=\"https:\/\/2.bp.blogspot.com\/-DMbPG0Q8CbE\/WwNeUUd9YOI\/AAAAAAAAADM\/pKSadMQRJKkX6cfKaYhIrLBnyFRmDPc4ACLcBGAs\/s1600\/BTP%2B7.jpg\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cimg border=\"0\" data-original-height=\"819\" data-original-width=\"1024\" height=\"511\" src=\"https:\/\/2.bp.blogspot.com\/-DMbPG0Q8CbE\/WwNeUUd9YOI\/AAAAAAAAADM\/pKSadMQRJKkX6cfKaYhIrLBnyFRmDPc4ACLcBGAs\/s640\/BTP%2B7.jpg\" width=\"640\" \/\u003E\u003C\/span\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003EWith 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: \u003Ci\u003Eof course\u003C\/i\u003E\u0026nbsp;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.\u0026nbsp;\u003C\/span\u003E\u003Cbr \/\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003ESimilar to the century bond claims, which have been given good treatment by \u003Ca href=\"https:\/\/twitter.com\/barnejek\/status\/994688207697661953\"\u003Eothers\u003C\/a\u003E, including \u003Ca href=\"https:\/\/twitter.com\/EMinflationista\/status\/994037670128087041\"\u003ETMM's Shawn\u003C\/a\u003E, 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 \u003Ci\u003Eouteperformed\u003C\/i\u003E\u0026nbsp;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.\u003C\/span\u003E\u003Cbr \/\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003Cbr \/\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ca href=\"https:\/\/3.bp.blogspot.com\/-yfPY5santtE\/WwNgdMoaEQI\/AAAAAAAAADY\/SFGR2udi4WsTUY-Z9XdDdZWvkUowdMWPwCLcBGAs\/s1600\/BTP%2B1.png\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cimg border=\"0\" data-original-height=\"351\" data-original-width=\"616\" height=\"364\" src=\"https:\/\/3.bp.blogspot.com\/-yfPY5santtE\/WwNgdMoaEQI\/AAAAAAAAADY\/SFGR2udi4WsTUY-Z9XdDdZWvkUowdMWPwCLcBGAs\/s640\/BTP%2B1.png\" width=\"640\" \/\u003E\u003C\/span\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003ENow, 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.\u003C\/span\u003E\u003Cbr \/\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003Cbr \/\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ca href=\"https:\/\/1.bp.blogspot.com\/-2AqeFytAxbQ\/WwNifKnE6xI\/AAAAAAAAADk\/ao4K1-tvgSMDSzSutypadwqdAvdwRnwKQCLcBGAs\/s1600\/BTP%2B2.png\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cimg border=\"0\" data-original-height=\"357\" data-original-width=\"602\" height=\"378\" src=\"https:\/\/1.bp.blogspot.com\/-2AqeFytAxbQ\/WwNifKnE6xI\/AAAAAAAAADk\/ao4K1-tvgSMDSzSutypadwqdAvdwRnwKQCLcBGAs\/s640\/BTP%2B2.png\" width=\"640\" \/\u003E\u003C\/span\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003EOf 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.\u003C\/span\u003E\u003Cbr \/\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003EWe 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.\u003C\/span\u003E\u003Cbr \/\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003Cbr \/\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ca href=\"https:\/\/1.bp.blogspot.com\/-XCKophG8W6k\/WwNlxHQRFaI\/AAAAAAAAADw\/egaKHjhfP2YLld_X9fCU6snUGirrh6u5ACLcBGAs\/s1600\/BTP%2B3.png\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cimg border=\"0\" data-original-height=\"351\" data-original-width=\"628\" height=\"356\" src=\"https:\/\/1.bp.blogspot.com\/-XCKophG8W6k\/WwNlxHQRFaI\/AAAAAAAAADw\/egaKHjhfP2YLld_X9fCU6snUGirrh6u5ACLcBGAs\/s640\/BTP%2B3.png\" width=\"640\" \/\u003E\u003C\/span\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003ESkeptics 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.\u003C\/span\u003E\u003Cbr \/\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ca href=\"https:\/\/1.bp.blogspot.com\/-zB-uGFghGmQ\/WwNnJq_3WdI\/AAAAAAAAAEA\/m54vYd0Dq0YDr7SE3YyMJcYSuN67GXqZgCLcBGAs\/s1600\/BTP%2B5.png\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cimg border=\"0\" data-original-height=\"638\" data-original-width=\"869\" height=\"469\" src=\"https:\/\/1.bp.blogspot.com\/-zB-uGFghGmQ\/WwNnJq_3WdI\/AAAAAAAAAEA\/m54vYd0Dq0YDr7SE3YyMJcYSuN67GXqZgCLcBGAs\/s640\/BTP%2B5.png\" width=\"640\" \/\u003E\u003C\/span\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: left;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003ETo 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!\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ca href=\"https:\/\/3.bp.blogspot.com\/-VbByZbgH7Jk\/WwNnD15TxBI\/AAAAAAAAAD8\/rLB6oiKRcagwPhCsW8yf9g-LCgXVzgrjACLcBGAs\/s1600\/BTP%2B4.png\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cimg border=\"0\" data-original-height=\"343\" data-original-width=\"622\" height=\"352\" src=\"https:\/\/3.bp.blogspot.com\/-VbByZbgH7Jk\/WwNnD15TxBI\/AAAAAAAAAD8\/rLB6oiKRcagwPhCsW8yf9g-LCgXVzgrjACLcBGAs\/s640\/BTP%2B4.png\" width=\"640\" \/\u003E\u003C\/span\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003EThe 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.\u003C\/span\u003E\u003Cbr \/\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003EAs 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.\u003C\/span\u003E\u003Cbr \/\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003Cbr \/\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ca href=\"https:\/\/1.bp.blogspot.com\/-PvCrEv0NpIc\/WwNpYmbEx2I\/AAAAAAAAAEY\/3gw0rGz80LAK7sSnoAGoMH_CsEbPfEf4QCLcBGAs\/s1600\/BTP%2B7.png\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em;\"\u003E\u003Cimg border=\"0\" data-original-height=\"388\" data-original-width=\"622\" height=\"398\" src=\"https:\/\/1.bp.blogspot.com\/-PvCrEv0NpIc\/WwNpYmbEx2I\/AAAAAAAAAEY\/3gw0rGz80LAK7sSnoAGoMH_CsEbPfEf4QCLcBGAs\/s640\/BTP%2B7.png\" width=\"640\" \/\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003EWith 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 \u003Ca href=\"https:\/\/www.youtube.com\/watch?v=idx3GSL2KWs\"\u003Eyou're down with BTP\u003C\/a\u003E.\u003C\/span\u003E\u003Cbr \/\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003Cbr \/\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ca href=\"https:\/\/1.bp.blogspot.com\/-tEJwPcwDmK8\/WwNugeKMc0I\/AAAAAAAAAEk\/Vwt3SOQUcSY47XB-Z93esB1h6ToWCmqAQCLcBGAs\/s1600\/Yanis.jpg\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em;\"\u003E\u003Cimg border=\"0\" data-original-height=\"394\" data-original-width=\"600\" height=\"420\" src=\"https:\/\/1.bp.blogspot.com\/-tEJwPcwDmK8\/WwNugeKMc0I\/AAAAAAAAAEk\/Vwt3SOQUcSY47XB-Z93esB1h6ToWCmqAQCLcBGAs\/s640\/Yanis.jpg\" width=\"640\" \/\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E"},"link":[{"rel":"replies","type":"application/atom+xml","href":"http:\/\/macro-man.blogspot.com\/feeds\/3025437403828975943\/comments\/default","title":"Post Comments"},{"rel":"replies","type":"text/html","href":"http:\/\/www.blogger.com\/comment.g?blogID=34323687\u0026postID=3025437403828975943","title":"39 Comments"},{"rel":"edit","type":"application/atom+xml","href":"http:\/\/www.blogger.com\/feeds\/34323687\/posts\/default\/3025437403828975943"},{"rel":"self","type":"application/atom+xml","href":"http:\/\/www.blogger.com\/feeds\/34323687\/posts\/default\/3025437403828975943"},{"rel":"alternate","type":"text/html","href":"http:\/\/macro-man.blogspot.com\/2018\/05\/arm-me-with-carry-conte-drop-load-on.html","title":"Arm Me With Carry, Conte Drop A Load On 'Em...BTP, How Can I Explain It?"}],"author":[{"name":{"$t":"Cackalack Capital"},"uri":{"$t":"http:\/\/www.blogger.com\/profile\/10765822411082053545"},"email":{"$t":"noreply@blogger.com"},"gd$image":{"rel":"http://schemas.google.com/g/2005#thumbnail","width":"16","height":"16","src":"https:\/\/img1.blogblog.com\/img\/b16-rounded.gif"}}],"media$thumbnail":{"xmlns$media":"http://search.yahoo.com/mrss/","url":"https:\/\/2.bp.blogspot.com\/-DMbPG0Q8CbE\/WwNeUUd9YOI\/AAAAAAAAADM\/pKSadMQRJKkX6cfKaYhIrLBnyFRmDPc4ACLcBGAs\/s72-c\/BTP%2B7.jpg","height":"72","width":"72"},"thr$total":{"$t":"39"}},{"id":{"$t":"tag:blogger.com,1999:blog-34323687.post-5007876110643173372"},"published":{"$t":"2018-05-21T04:40:00.002+01:00"},"updated":{"$t":"2018-05-21T12:53:16.216+01:00"},"title":{"type":"text","$t":"Argentina: Chronicle of an IMF Bailout Foretold"},"content":{"type":"html","$t":"\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EGreetings 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. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb id=\"docs-internal-guid-2dd57b5b-80bf-fff6-335e-a97e2790e3e8\" style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EThis 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. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EArgentina 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. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EFast 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. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EIt started slowly...and then as ever in EM...all at once: \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cimg 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\" \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EBang...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. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EHaving 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: \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003EBack in September, \u003C\/span\u003E\u003Ca href=\"https:\/\/macro-man.blogspot.com\/2017\/09\/argentina-think-globally-act-locally.html\" style=\"text-decoration: none;\"\u003E\u003Cspan style=\"background-color: transparent; color: #1155cc; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;\"\u003EI wrote this\u003C\/span\u003E\u003C\/a\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E on Argentina: \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E“\u003C\/span\u003E\u003Cspan style=\"background-color: white; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003EI 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” \u0026nbsp;\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cspan style=\"background-color: white; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;\"\u003EGrade: B.\u003C\/span\u003E\u003Cspan style=\"background-color: white; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E 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. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: white; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E“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, \u0026nbsp;which means the government is going to be running up a larger debt load for the foreseeable future. “  \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cspan style=\"background-color: white; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;\"\u003EGrade: A-.\u003C\/span\u003E\u003Cspan style=\"background-color: white; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E Many real money folks were simply enamoured with the story, and didn’t really check under the hood. \u0026nbsp;Macri cut the deficit, but ignored his addiction to short-term financing.\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E“\u003C\/span\u003E\u003Cspan style=\"background-color: white; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003EEither 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.” \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cspan style=\"background-color: white; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;\"\u003EGrade: A. \u0026nbsp;\u003C\/span\u003E\u003Cspan style=\"background-color: white; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003EMaybe there’s a spot for me at Hacienda when Macri finally cleans house. Or a cushy consulting gig with the IMF? \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: white; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EI’m feeling pretty good so far. Now, let’s talk about the currency!\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: white; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E“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.” \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cspan style=\"background-color: white; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;\"\u003EGrade: D\u003C\/span\u003E\u003Cspan style=\"background-color: white; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E. 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 \u0026nbsp;will appreciate over time”. I blame my editor. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: white; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EThen 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.” \u0026nbsp;\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cspan style=\"background-color: white; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;\"\u003EGrade: D+.\u003C\/span\u003E\u003Cspan style=\"background-color: white; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E 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. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cspan style=\"background-color: white; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cspan style=\"background-color: white; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003EYet, 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. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: white; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003ETo summarize, I think this shows that there are no easy routes to investing success. \u0026nbsp;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. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: white; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EWith that, a quick post-mortem on how Argentina got to this point, and where they may go from here. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: white; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EFirst 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. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cimg 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\" \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EYou 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. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EHand in hand with that chart is this one: \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cimg 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\" \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EWhen 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. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EThat’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. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EThen came the unpredictable. This is a chart of global \u0026nbsp;soybean production, with Argentina on the bottom tile. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cimg 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\" \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003EWhat you see there is a drop in production by roughly a third, which adds up to roughly $7 billion in lost export revenue \u003C\/span\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003Ejust in soybeans alone\u003C\/span\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E. Add a couple more yards from corn and other agricultural products, and this is a pretty big event. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EThis 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)\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EBrad 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: \u0026nbsp;\u0026nbsp;\u0026nbsp;\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cimg 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\" \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003EThe 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 \u003C\/span\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003Elocal \u003C\/span\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003Efinancing 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. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EThat 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) \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cimg 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\" \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EWith 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. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EWhere does that leave us in the market? Would you be surprised to hear...not very far from previous levels?!? \u0026nbsp;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? \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003Cbr \/\u003E\u003Cbr \/\u003E\u003Cbr \/\u003E\u003Cbr \/\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cimg 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\" \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EYes 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. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EWhere 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. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EWhat 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. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EArgentina lost. Others will too. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EShawn\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: large;\"\u003E\u003Cspan style=\"white-space: pre-wrap;\"\u003ETeamMacroMan2@gmail.com @EMInflationista\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E"},"link":[{"rel":"replies","type":"application/atom+xml","href":"http:\/\/macro-man.blogspot.com\/feeds\/5007876110643173372\/comments\/default","title":"Post Comments"},{"rel":"replies","type":"text/html","href":"http:\/\/www.blogger.com\/comment.g?blogID=34323687\u0026postID=5007876110643173372","title":"29 Comments"},{"rel":"edit","type":"application/atom+xml","href":"http:\/\/www.blogger.com\/feeds\/34323687\/posts\/default\/5007876110643173372"},{"rel":"self","type":"application/atom+xml","href":"http:\/\/www.blogger.com\/feeds\/34323687\/posts\/default\/5007876110643173372"},{"rel":"alternate","type":"text/html","href":"http:\/\/macro-man.blogspot.com\/2018\/05\/argentina-chronicle-of-imf-bailout.html","title":"Argentina: Chronicle of an IMF Bailout Foretold"}],"author":[{"name":{"$t":"EM Inflationista"},"uri":{"$t":"http:\/\/www.blogger.com\/profile\/13376753485910252234"},"email":{"$t":"noreply@blogger.com"},"gd$image":{"rel":"http://schemas.google.com/g/2005#thumbnail","width":"32","height":"32","src":"\/\/4.bp.blogspot.com\/-VK2YiYEkB_o\/XI79hGr3rAI\/AAAAAAAADcc\/k0TIRG0Uww8W0ywSOtL6xguQbzOzyOm7gCK4BGAYYCw\/s113\/brazil.jpg"}}],"media$thumbnail":{"xmlns$media":"http://search.yahoo.com/mrss/","url":"https:\/\/lh5.googleusercontent.com\/7tT_lg_Bz2_cUijKBYD4WHlhOMYCmmc8PyXDk0G9bYSMVc_FZj_ExgD3QKiY8udcgYZ8ZzNhVYIFHiDz82x5vciXSi2cr3Xgrcgm2OYTEhH5sCqw2FYo0GJCduL4ntnfyzvAsa9x=s72-c","height":"72","width":"72"},"thr$total":{"$t":"29"}},{"id":{"$t":"tag:blogger.com,1999:blog-34323687.post-8328201177092694147"},"published":{"$t":"2018-05-18T08:11:00.000+01:00"},"updated":{"$t":"2018-05-18T08:26:24.005+01:00"},"title":{"type":"text","$t":"William Tell wake up, Switzerland has gone mad!"},"content":{"type":"html","$t":"\u003Cbr \/\u003E\u003Cbr \/\u003E\u003Ctable align=\"center\" cellpadding=\"0\" cellspacing=\"0\" class=\"tr-caption-container\" style=\"margin-left: auto; margin-right: auto; text-align: center;\"\u003E\u003Ctbody\u003E\u003Ctr\u003E\u003Ctd style=\"text-align: center;\"\u003E\u003Ca href=\"https:\/\/4.bp.blogspot.com\/-TZrf8ET7cs8\/Wv2Wgg8Fy2I\/AAAAAAAAAC0\/jGxwvTB86AQIxCZCVqSsLWfFxJwpHseRgCLcBGAs\/s1600\/william%2Btell.jpg\" imageanchor=\"1\" style=\"margin-left: auto; margin-right: auto;\"\u003E\u003Cimg border=\"0\" data-original-height=\"500\" data-original-width=\"498\" height=\"640\" src=\"https:\/\/4.bp.blogspot.com\/-TZrf8ET7cs8\/Wv2Wgg8Fy2I\/AAAAAAAAAC0\/jGxwvTB86AQIxCZCVqSsLWfFxJwpHseRgCLcBGAs\/s640\/william%2Btell.jpg\" width=\"635\" \/\u003E\u003C\/a\u003E\u003C\/td\u003E\u003C\/tr\u003E\u003Ctr\u003E\u003Ctd class=\"tr-caption\" style=\"text-align: center;\"\u003E\u003Cspan style=\"font-size: small;\"\u003EWilliam Tell contemplating SNB's portfolio\u003C\/span\u003E\u003C\/td\u003E\u003C\/tr\u003E\u003C\/tbody\u003E\u003C\/table\u003E\u003Cspan style=\"font-size: 13.5pt; text-align: justify;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003Cspan style=\"font-size: 13.5pt; text-align: justify;\"\u003EOn June 10th, Swiss voters will cast their votes on the Vollgeld referendum:\u0026nbsp;\u003C\/span\u003E\u003Cspan style=\"color: blue;\"\u003E\u003Ca 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\"\u003E\"F\u003C\/a\u003E\u003Ca 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\"\u003Eor crisis-safe money: Money creation by the National Bank only! (Sovereign Money Initiative).\"\u003C\/a\u003E\u003Cspan style=\"font-size: 9.5pt; text-align: justify;\"\u003E\u0026nbsp;\u003C\/span\u003E\u003C\/span\u003E\u003Cbr \/\u003E\u003Cbr \/\u003E\u003Cdiv style=\"margin: 0cm 0cm 0.0001pt; text-align: justify;\"\u003E\u003Cspan style=\"font-size: 13.5pt;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv style=\"margin: 0cm 0cm 0.0001pt; text-align: justify;\"\u003E\u003Cspan style=\"font-size: 13.5pt;\"\u003EWhat is it about?\u0026nbsp; 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.\u0026nbsp; Fractional reserve banking allows that only a fraction of deposits held by banks are backed by central bank money.\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv style=\"text-align: justify;\"\u003E\u003Cspan style=\"font-size: 18px;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cspan style=\"font-size: 13.5pt;\"\u003E\u003C\/span\u003E\u003Cbr \/\u003E\u003Cdiv style=\"text-align: justify;\"\u003E\u003Cspan style=\"font-size: 13.5pt;\"\u003E\u003Cspan style=\"font-size: 13.5pt;\"\u003EThe 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.”.\u0026nbsp; 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\u0026nbsp;\u003C\/span\u003E\u003Ca 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\"\u003E\u003Cspan style=\"text-decoration-line: none;\"\u003Evollgeld paper\u003C\/span\u003E\u003C\/a\u003E\u003Cspan style=\"font-size: 13.5pt;\"\u003E\u0026nbsp; have severe drawbacks, we will look at them later.\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cspan style=\"font-size: 13.5pt;\"\u003E\u003C\/span\u003E\u003Cbr \/\u003E\u003Cdiv style=\"margin-bottom: .0001pt; margin: 0cm;\"\u003E\u003C\/div\u003E\u003Cdiv style=\"text-align: justify;\"\u003E\u003Cspan style=\"font-size: 18px;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cspan style=\"color: black; font-size: 13.5pt;\"\u003E\u003C\/span\u003E\u003Cbr \/\u003E\u003Cdiv style=\"text-align: justify;\"\u003E\u003Cspan style=\"color: black; font-size: 13.5pt;\"\u003E\u003Cspan style=\"font-size: 13.5pt;\"\u003EIf 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\u0026nbsp;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.\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cspan style=\"color: black; font-size: 13.5pt;\"\u003E\u003Co:p\u003E\u003C\/o:p\u003E\u003C\/span\u003E\u003Cbr \/\u003E\u003Cdiv style=\"margin: 0cm 0cm 0.0001pt; text-align: justify;\"\u003E\u003Cbr \/\u003E\u003C\/div\u003E\u003Cdiv style=\"-webkit-text-stroke-width: 0px; font-variant-caps: normal; font-variant-ligatures: normal; margin: 0cm 0cm 0.0001pt; orphans: 2; text-align: justify; text-decoration-color: initial; text-decoration-style: initial; widows: 2; word-spacing: 0px;\"\u003E\u003Cspan style=\"color: black; font-size: 13.5pt;\"\u003ESome will say it is not that easy to pass a\u0026nbsp;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\u0026nbsp;at 16%, one out today from Tamedia shows No at 54%, Yes at 39%, Undecided at 7%.\u003Co:p\u003E\u003C\/o:p\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv style=\"margin: 0cm 0cm 0.0001pt; text-align: justify;\"\u003E\u003Cspan style=\"color: black; font-size: 13.5pt;\"\u003EIt's not because something has a low chance of happening that it must be discarded completely especially given the consequences are so asymmetric.\u003Co:p\u003E\u003C\/o:p\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv class=\"MsoNormal\" style=\"text-align: justify;\"\u003E\u003Cbr \/\u003E\u003C\/div\u003E\u003Cdiv style=\"margin: 0cm 0cm 0.0001pt; text-align: justify;\"\u003E\u003Cspan style=\"font-size: 13.5pt;\"\u003EThe Swiss institutions (Confederation, SNB, Banks...) and most of the academics (a great paper from Philippe Bachetta can be found\u0026nbsp;\u003Ca 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\"\u003E\u003Cspan style=\"color: blue; text-decoration: none;\"\u003Ehere\u003C\/span\u003E\u003C\/a\u003E) oppose the referendum initiative. I do share their arguments and will try to summarize them below.\u003Co:p\u003E\u003C\/o:p\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv style=\"margin: 0cm 0cm 0.0001pt; text-align: justify;\"\u003E\u003Cbr \/\u003E\u003C\/div\u003E\u003Cdiv style=\"margin: 0cm 0cm 0.0001pt; text-align: justify;\"\u003E\u003Cspan style=\"color: black; font-size: 13.5pt;\"\u003EThe proposal would separate money and credit.\u0026nbsp; It will move away from the historical\u0026nbsp;distribution\u0026nbsp;of\u0026nbsp;responsibilities\u0026nbsp;between the SNB and the banking system.\u003Co:p\u003E\u003C\/o:p\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv style=\"margin: 0cm 0cm 0.0001pt; text-align: justify;\"\u003E\u003Cspan style=\"color: black; font-size: 13.5pt;\"\u003EThe 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.\u0026nbsp;\u003Co:p\u003E\u003C\/o:p\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv style=\"margin: 0cm 0cm 0.0001pt; text-align: justify;\"\u003E\u003Cspan style=\"color: black; font-size: 13.5pt;\"\u003ETo be true credit risk is already\u0026nbsp;present\u0026nbsp;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.\u003Co:p\u003E\u003C\/o:p\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Co:p\u003E\u003C\/o:p\u003E \u003Cbr \/\u003E\u003Cdiv style=\"margin: 0cm 0cm 0.0001pt; text-align: justify;\"\u003E\u003Cbr \/\u003E\u003C\/div\u003E\u003Cdiv style=\"margin: 0cm 0cm 0.0001pt; text-align: justify;\"\u003E\u003Cspan style=\"color: black; font-size: 13.5pt;\"\u003ESovereign money will limit liquidity and maturity\u0026nbsp;transformation\u0026nbsp;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\u0026nbsp;initiative\u0026nbsp;does not address the too big to fail issue as\u0026nbsp;misjudgement\u0026nbsp;and over lending can still exist. It does not address the shadow banking issue either.\u003Co:p\u003E\u003C\/o:p\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Co:p\u003E\u003C\/o:p\u003E \u003Cbr \/\u003E\u003Cdiv style=\"margin: 0cm 0cm 0.0001pt; text-align: justify;\"\u003E\u003Cbr \/\u003E\u003C\/div\u003E\u003Cdiv style=\"margin: 0cm 0cm 0.0001pt; text-align: justify;\"\u003E\u003Cspan style=\"color: black; font-size: 13.5pt;\"\u003ESNB 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.\u003Co:p\u003E\u003C\/o:p\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv style=\"margin: 0cm 0cm 0.0001pt; text-align: justify;\"\u003E\u003Cspan style=\"color: black; font-size: 13.5pt;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv style=\"margin-bottom: .0001pt; margin: 0cm;\"\u003E\u003Cspan style=\"color: black; font-size: 13.5pt;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ca href=\"https:\/\/3.bp.blogspot.com\/-zWzS4TWzApY\/Wv2V4SIhagI\/AAAAAAAAACk\/xTe98vWtlo03mF2MvUTCBpWiGF5LSOTCQCLcBGAs\/s1600\/doc.jpg\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em;\"\u003E\u003Cimg border=\"0\" data-original-height=\"420\" data-original-width=\"731\" height=\"366\" src=\"https:\/\/3.bp.blogspot.com\/-zWzS4TWzApY\/Wv2V4SIhagI\/AAAAAAAAACk\/xTe98vWtlo03mF2MvUTCBpWiGF5LSOTCQCLcBGAs\/s640\/doc.jpg\" width=\"640\" \/\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cdiv style=\"margin-bottom: .0001pt; margin: 0cm;\"\u003E\u003Cspan style=\"color: black; font-size: 13.5pt;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv style=\"margin-bottom: .0001pt; margin: 0cm;\"\u003E\u003Cspan style=\"color: black; font-size: 13.5pt;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv style=\"margin-bottom: .0001pt; margin: 0cm;\"\u003E\u003Cspan style=\"font-size: 13.5pt;\"\u003ESovereign 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.\u0026nbsp; It creates a huge uncertainty for the Swiss economy.\u003Co:p\u003E\u003C\/o:p\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cbr \/\u003E\u003Cdiv style=\"margin-bottom: .0001pt; margin: 0cm;\"\u003E\u003Cspan style=\"font-size: 13.5pt;\"\u003EOne of the problem with the underlying idea of money targeting is that is there is no historical link between money creation and credit provision.\u003Co:p\u003E\u003C\/o:p\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv style=\"margin-bottom: .0001pt; margin: 0cm;\"\u003E\u003Cbr \/\u003E\u003C\/div\u003E\u003Cdiv style=\"margin: 0cm 0cm 0.0001pt; text-align: center;\"\u003E\u003Cspan style=\"font-size: 13.5pt;\"\u003EM1 and Total Credit per GDP\u003Co:p\u003E\u003C\/o:p\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv style=\"margin-bottom: .0001pt; margin: 0cm;\"\u003E\u003C\/div\u003E\u003Cdiv style=\"margin: 0cm 0cm 0.0001pt; text-align: center;\"\u003E\u003Cspan style=\"font-size: 13.5pt;\"\u003E\u0026nbsp;(The Sovereign Money Initiative in Switzerland: An Assessment Philippe Bacchetta, June 2017)\u003Co:p\u003E\u003C\/o:p\u003E\u003C\/span\u003E\u003Co:p\u003E\u003C\/o:p\u003E\u003C\/div\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ca href=\"https:\/\/2.bp.blogspot.com\/-qz4vbZeztaQ\/Wv2WHjEJl8I\/AAAAAAAAACo\/TvLhoRWlOKMEEeftJGUOcoKlPiO0MeQfQCLcBGAs\/s1600\/ggg.png\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em;\"\u003E\u003Cimg border=\"0\" data-original-height=\"446\" data-original-width=\"584\" height=\"488\" src=\"https:\/\/2.bp.blogspot.com\/-qz4vbZeztaQ\/Wv2WHjEJl8I\/AAAAAAAAACo\/TvLhoRWlOKMEEeftJGUOcoKlPiO0MeQfQCLcBGAs\/s640\/ggg.png\" width=\"640\" \/\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cdiv style=\"margin-bottom: .0001pt; margin: 0cm;\"\u003E\u003Cspan style=\"font-size: 13.5pt;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cbr \/\u003E\u003Cdiv style=\"margin-bottom: .0001pt; margin: 0cm;\"\u003E\u003Cspan style=\"color: black; font-size: 13.5pt;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv style=\"margin-bottom: .0001pt; margin: 0cm;\"\u003E\u003Cspan style=\"font-size: 13.5pt;\"\u003EThe other problems lie in the implementation of the change.\u0026nbsp;\u003C\/span\u003E\u003C\/div\u003E\u003Cbr \/\u003E\u003Cdiv style=\"margin-bottom: .0001pt; margin: 0cm;\"\u003E\u003Cspan style=\"font-size: 13.5pt;\"\u003EAs 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.\u0026nbsp;The Vollgeld paper sees it happening in 2 steps:\u003Co:p\u003E\u003C\/o:p\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv style=\"margin-bottom: .0001pt; margin: 0cm;\"\u003E\u003Cspan style=\"font-size: 13.5pt;\"\u003E1- SNB lends its reserves to fill the financing gap.\u003Co:p\u003E\u003C\/o:p\u003E\u003C\/span\u003E\u003Co:p\u003E\u003C\/o:p\u003E\u003C\/div\u003E\u003Cdiv style=\"margin-bottom: .0001pt; margin: 0cm;\"\u003E\u003Cspan style=\"font-size: 13.5pt;\"\u003E2- Banks need to find alternate sources of financing.\u0026nbsp;\u003Co:p\u003E\u003C\/o:p\u003EIt can borrow money from the Swiss National Bank, it can borrow from other banks, it can incentivize customers to place their money in savings\u0026nbsp;accounts, it can issue shares or bonds.\u003Co:p\u003E\u003C\/o:p\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv style=\"margin-bottom: .0001pt; margin: 0cm;\"\u003E\u003Cbr \/\u003E\u003C\/div\u003E\u003Cdiv style=\"margin-bottom: .0001pt; margin: 0cm;\"\u003E\u003Cspan style=\"font-size: 13.5pt;\"\u003EIt 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.\u0026nbsp; It could lead to an increase in Euros transactions in Switzerland! We could see a switch to short term funding which is more volatile.\u0026nbsp;\u003Co:p\u003E\u003C\/o:p\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv style=\"margin-bottom: .0001pt; margin: 0cm;\"\u003E\u003Cspan style=\"font-size: 13.5pt;\"\u003EGiven 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.\u003Co:p\u003E\u003C\/o:p\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv style=\"margin-bottom: .0001pt; margin: 0cm;\"\u003E\u003Cbr \/\u003E\u003C\/div\u003E\u003Cdiv style=\"margin-bottom: .0001pt; margin: 0cm;\"\u003E\u003Cspan style=\"font-size: 13.5pt;\"\u003ELet's now have a look at the economic impact.\u003Co:p\u003E\u003C\/o:p\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv style=\"margin-bottom: .0001pt; margin: 0cm;\"\u003E\u003Cbr \/\u003E\u003C\/div\u003E\u003Cdiv style=\"margin-bottom: .0001pt; margin: 0cm;\"\u003E\u003Cspan style=\"font-size: 13.5pt;\"\u003EAs 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\u0026nbsp;\u003Cb\u003E\u003Cu\u003E-0.8%\/annually\u003C\/u\u003E\u003C\/b\u003E.\u0026nbsp; This cost would be borne out by households and banks, it should be seen as a lower-bound, as other costs\u0026nbsp;(implementation, regulation costs etc) are most difficult to assess.\u003Co:p\u003E\u003C\/o:p\u003E\u003C\/span\u003E\u003Cbr \/\u003E\u003Cspan style=\"font-size: 13.5pt;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003Cspan style=\"font-size: 13.5pt;\"\u003EWhat 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.\u0026nbsp;\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv style=\"margin-bottom: .0001pt; margin: 0cm;\"\u003E\u003Cbr \/\u003E\u003C\/div\u003E\u003Cdiv style=\"margin-bottom: .0001pt; margin: 0cm;\"\u003E\u003Cspan style=\"font-size: 13.5pt;\"\u003EAs 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.”\u0026nbsp;\u003Co:p\u003E\u003C\/o:p\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv style=\"margin-bottom: .0001pt; margin: 0cm;\"\u003E\u003Cbr \/\u003E\u003C\/div\u003E\u003Cdiv style=\"margin-bottom: .0001pt; margin: 0cm;\"\u003E\u003Cspan style=\"font-size: 13.5pt;\"\u003EThere 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.\u0026nbsp;\u003Co:p\u003E\u003C\/o:p\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv style=\"margin-bottom: .0001pt; margin: 0cm;\"\u003E\u003Cspan style=\"font-size: 13.5pt;\"\u003EThere is a snowball chance in hell that people will dig deep enough to get a thorough understanding of this technical issue.\u0026nbsp;\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv style=\"margin-bottom: .0001pt; margin: 0cm;\"\u003E\u003Cspan style=\"font-size: 13.5pt;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv style=\"margin-bottom: .0001pt; margin: 0cm;\"\u003E\u003Cspan style=\"font-size: 13.5pt;\"\u003EThe current wave of populism makes me very nervous as to the outcome of this referendum. I hope the Swiss are immune to it.\u003Co:p\u003E\u003C\/o:p\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv class=\"MsoNormal\"\u003E\u003Cbr \/\u003E\u003C\/div\u003E\u003Cdiv class=\"MsoNormal\"\u003E\u003Cbr \/\u003E\u003C\/div\u003E\u003Cdiv style=\"margin-bottom: .0001pt; margin: 0cm;\"\u003E\u003Co:p\u003E\u003C\/o:p\u003E                     \u003C\/div\u003E\u003Cdiv class=\"MsoNormal\"\u003E\u003Cspan style=\"font-family: \u0026quot;times new roman\u0026quot; , serif; font-size: 13.5pt; line-height: 107%;\"\u003EMacroDiver\u003Co:p\u003E\u003C\/o:p\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cbr \/\u003E\u003Cdiv style=\"margin-bottom: .0001pt; margin: 0cm;\"\u003E\u003Cspan style=\"color: black; font-size: 13.5pt;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv style=\"margin-bottom: .0001pt; margin: 0cm;\"\u003E\u003Cspan style=\"color: black; font-size: 13.5pt;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv style=\"margin-bottom: .0001pt; margin: 0cm;\"\u003E\u003Cspan style=\"color: black; font-size: 13.5pt;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv style=\"margin-bottom: .0001pt; margin: 0cm;\"\u003E\u003Cspan style=\"color: black; font-size: 13.5pt;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv style=\"margin-bottom: .0001pt; margin: 0cm;\"\u003E\u003Cspan style=\"color: black; font-size: 13.5pt;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv style=\"margin-bottom: .0001pt; margin: 0cm;\"\u003E\u003Cspan style=\"color: black; font-size: 13.5pt;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv style=\"margin-bottom: .0001pt; margin: 0cm;\"\u003E\u003Cspan style=\"color: black; font-size: 13.5pt;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv style=\"margin-bottom: .0001pt; margin: 0cm;\"\u003E\u003Cspan style=\"color: black; font-size: 13.5pt;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv style=\"margin-bottom: .0001pt; margin: 0cm;\"\u003E\u003Cspan style=\"color: black; font-size: 13.5pt;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv style=\"margin-bottom: .0001pt; margin: 0cm;\"\u003E\u003Cspan style=\"color: black; font-size: 13.5pt;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv style=\"margin-bottom: .0001pt; margin: 0cm;\"\u003E\u003Cspan style=\"color: black; font-size: 13.5pt;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv style=\"margin-bottom: .0001pt; margin: 0cm;\"\u003E\u003Cspan style=\"color: black; font-size: 13.5pt;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv style=\"margin-bottom: .0001pt; margin: 0cm;\"\u003E\u003Cspan style=\"color: black; font-size: 13.5pt;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv style=\"margin-bottom: .0001pt; margin: 0cm;\"\u003E\u003Cspan style=\"color: black; font-size: 13.5pt;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv style=\"margin-bottom: .0001pt; margin: 0cm;\"\u003E\u003Cspan style=\"color: black; font-size: 13.5pt;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv style=\"margin-bottom: .0001pt; margin: 0cm;\"\u003E\u003Cspan style=\"color: black; font-size: 13.5pt;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv style=\"margin-bottom: .0001pt; margin: 0cm;\"\u003E\u003Cspan style=\"color: black; font-size: 13.5pt;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cbr \/\u003E"},"link":[{"rel":"replies","type":"application/atom+xml","href":"http:\/\/macro-man.blogspot.com\/feeds\/8328201177092694147\/comments\/default","title":"Post Comments"},{"rel":"replies","type":"text/html","href":"http:\/\/www.blogger.com\/comment.g?blogID=34323687\u0026postID=8328201177092694147","title":"307 Comments"},{"rel":"edit","type":"application/atom+xml","href":"http:\/\/www.blogger.com\/feeds\/34323687\/posts\/default\/8328201177092694147"},{"rel":"self","type":"application/atom+xml","href":"http:\/\/www.blogger.com\/feeds\/34323687\/posts\/default\/8328201177092694147"},{"rel":"alternate","type":"text/html","href":"http:\/\/macro-man.blogspot.com\/2018\/05\/william-tell-wake-up-switzerland-has_18.html","title":"William Tell wake up, Switzerland has gone mad!"}],"author":[{"name":{"$t":"Anonymous"},"uri":{"$t":"http:\/\/www.blogger.com\/profile\/05759305433915605860"},"email":{"$t":"noreply@blogger.com"},"gd$image":{"rel":"http://schemas.google.com/g/2005#thumbnail","width":"16","height":"16","src":"https:\/\/img1.blogblog.com\/img\/b16-rounded.gif"}}],"media$thumbnail":{"xmlns$media":"http://search.yahoo.com/mrss/","url":"https:\/\/4.bp.blogspot.com\/-TZrf8ET7cs8\/Wv2Wgg8Fy2I\/AAAAAAAAAC0\/jGxwvTB86AQIxCZCVqSsLWfFxJwpHseRgCLcBGAs\/s72-c\/william%2Btell.jpg","height":"72","width":"72"},"thr$total":{"$t":"307"}},{"id":{"$t":"tag:blogger.com,1999:blog-34323687.post-3618116463227553489"},"published":{"$t":"2018-05-02T13:20:00.001+01:00"},"updated":{"$t":"2018-05-02T13:20:51.542+01:00"},"title":{"type":"text","$t":"Strong And Stable, Valuations Edition"},"content":{"type":"html","$t":"\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003EIt'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.\u003C\/span\u003E\u003Cbr \/\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003Cbr \/\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ca href=\"https:\/\/1.bp.blogspot.com\/-IK-mNJc_OEM\/Wueu1UrEXfI\/AAAAAAAAABw\/J3591SqlyiMfG5n3ikobjYbuJ_3DnaftwCLcBGAs\/s1600\/043018%2BMM%2B1.png\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cimg border=\"0\" data-original-height=\"391\" data-original-width=\"630\" src=\"https:\/\/1.bp.blogspot.com\/-IK-mNJc_OEM\/Wueu1UrEXfI\/AAAAAAAAABw\/J3591SqlyiMfG5n3ikobjYbuJ_3DnaftwCLcBGAs\/s1600\/043018%2BMM%2B1.png\" \/\u003E\u003C\/span\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003ESo 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.\u0026nbsp;\u003C\/span\u003E\u003Cbr \/\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003Cbr \/\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ca href=\"https:\/\/2.bp.blogspot.com\/-4Cn99pRxWS0\/Wuev1-2Kh3I\/AAAAAAAAACQ\/7UkUsJYTDxE_eRNgigP2bepT2UiJaGMVACLcBGAs\/s1600\/043018%2BMM%2B5.png\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cimg border=\"0\" data-original-height=\"785\" data-original-width=\"929\" height=\"540\" src=\"https:\/\/2.bp.blogspot.com\/-4Cn99pRxWS0\/Wuev1-2Kh3I\/AAAAAAAAACQ\/7UkUsJYTDxE_eRNgigP2bepT2UiJaGMVACLcBGAs\/s640\/043018%2BMM%2B5.png\" width=\"640\" \/\u003E\u003C\/span\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003Cbr \/\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003C\/div\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003EWe 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 \u003Ci\u003Esome \u003C\/i\u003Eforward-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.\u003C\/span\u003E\u003Cbr \/\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003EOkay so with that off our chest, we'll ask the question: is the US equity market \u003Ci\u003Ereally\u003C\/i\u003E\u0026nbsp;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!\u003C\/span\u003E\u003Cbr \/\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003EBut, 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).\u003C\/span\u003E\u003Cbr \/\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003Cbr \/\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ca href=\"https:\/\/4.bp.blogspot.com\/-LXS7qbhu1wY\/Wuey7aDwb_I\/AAAAAAAAACc\/rEFDdmMVZ-U6C3zJ3s751Z8hdduvEnPRACLcBGAs\/s1600\/043018%2BMM%2B6.png\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cimg border=\"0\" data-original-height=\"384\" data-original-width=\"624\" src=\"https:\/\/4.bp.blogspot.com\/-LXS7qbhu1wY\/Wuey7aDwb_I\/AAAAAAAAACc\/rEFDdmMVZ-U6C3zJ3s751Z8hdduvEnPRACLcBGAs\/s1600\/043018%2BMM%2B6.png\" \/\u003E\u003C\/span\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003EThe 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: \u003Ci\u003EMSCI World\u003C\/i\u003E\u0026nbsp;Tech trades richer than that, at 17.53x!\u0026nbsp;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!\u003C\/span\u003E\u003Cbr \/\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003EThis was recently explored in a good post by \u003Ca href=\"http:\/\/www.fortunefinancialadvisors.com\/blog\/how-differences-in-composition-distort-market-valuation-differences\"\u003ELawrence Hamtil\u003C\/a\u003E. [We also note @modestproposal1 as a \u003Ca href=\"https:\/\/twitter.com\/modestproposal1\/status\/552488882512855040\"\u003Efrequent\u003C\/a\u003E \u003Ca href=\"https:\/\/twitter.com\/modestproposal1\/status\/543815447242895360\"\u003Econtributor\u003C\/a\u003E 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 \u003Ci\u003Eperfect sense\u003C\/i\u003E\u0026nbsp;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.\u003C\/span\u003E\u003Cbr \/\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003ETo 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.\u0026nbsp;\u003C\/span\u003E\u003Cbr \/\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003Cbr \/\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ca href=\"https:\/\/3.bp.blogspot.com\/-EsZf9X_7rhQ\/Wue1MMPqIWI\/AAAAAAAAACo\/6QtYPXdAbyYEarJkJLOKJIZuVHowYcoiACLcBGAs\/s1600\/043018%2BMM%2B7.png\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cimg border=\"0\" data-original-height=\"387\" data-original-width=\"622\" src=\"https:\/\/3.bp.blogspot.com\/-EsZf9X_7rhQ\/Wue1MMPqIWI\/AAAAAAAAACo\/6QtYPXdAbyYEarJkJLOKJIZuVHowYcoiACLcBGAs\/s1600\/043018%2BMM%2B7.png\" \/\u003E\u003C\/span\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003C\/div\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003EWe'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.\u0026nbsp;\u003C\/span\u003E\u003Cbr \/\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ca href=\"https:\/\/1.bp.blogspot.com\/-EvLaH0TqJNo\/Wueu1SV2zCI\/AAAAAAAAACA\/AW380_t99OgdOWscxfEcY-VebPMqkeiwwCEwYBhgL\/s1600\/043018%2BMM%2B2.png\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cimg border=\"0\" data-original-height=\"390\" data-original-width=\"631\" src=\"https:\/\/1.bp.blogspot.com\/-EvLaH0TqJNo\/Wueu1SV2zCI\/AAAAAAAAACA\/AW380_t99OgdOWscxfEcY-VebPMqkeiwwCEwYBhgL\/s1600\/043018%2BMM%2B2.png\" \/\u003E\u003C\/span\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ca href=\"https:\/\/3.bp.blogspot.com\/-KSYHC0ipFB0\/Wueu1TbSd8I\/AAAAAAAAACE\/i_uJDxyFVEkNJmSWffVPIku2x7QJPSKLwCEwYBhgL\/s1600\/043018%2BMM%2B3.png\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cimg border=\"0\" data-original-height=\"390\" data-original-width=\"631\" src=\"https:\/\/3.bp.blogspot.com\/-KSYHC0ipFB0\/Wueu1TbSd8I\/AAAAAAAAACE\/i_uJDxyFVEkNJmSWffVPIku2x7QJPSKLwCEwYBhgL\/s1600\/043018%2BMM%2B3.png\" \/\u003E\u003C\/span\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cbr \/\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ca href=\"https:\/\/2.bp.blogspot.com\/-COzYNjGYD5k\/Wueu1ngK0JI\/AAAAAAAAACI\/VbC1ksO36cYL0N4UngkVInVyr4Y47iERwCEwYBhgL\/s1600\/043018%2BMM%2B4.png\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cimg border=\"0\" data-original-height=\"390\" data-original-width=\"631\" src=\"https:\/\/2.bp.blogspot.com\/-COzYNjGYD5k\/Wueu1ngK0JI\/AAAAAAAAACI\/VbC1ksO36cYL0N4UngkVInVyr4Y47iERwCEwYBhgL\/s1600\/043018%2BMM%2B4.png\" \/\u003E\u003C\/span\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cbr \/\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003EOur 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.\u003C\/span\u003E\u003Cbr \/\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003Cbr \/\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ca href=\"https:\/\/3.bp.blogspot.com\/-sGiyU_j5H_A\/Wue329zmrRI\/AAAAAAAAAC0\/5s2rFNEsufU6EdpPPu2MglMz-aWQQNvZQCLcBGAs\/s1600\/043018%2BMM%2B8.png\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em;\"\u003E\u003Cimg border=\"0\" data-original-height=\"386\" data-original-width=\"618\" src=\"https:\/\/3.bp.blogspot.com\/-sGiyU_j5H_A\/Wue329zmrRI\/AAAAAAAAAC0\/5s2rFNEsufU6EdpPPu2MglMz-aWQQNvZQCLcBGAs\/s1600\/043018%2BMM%2B8.png\" \/\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003EValuation 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 \u003Ca href=\"https:\/\/www.ft.com\/content\/cd516726-46d8-11e7-8d27-59b4dd6296b8\"\u003Efolded\u003C\/a\u003E 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 \u003Ci\u003Ethere isn't\u003C\/i\u003E\u0026nbsp;a trade. Sometimes capital saved by not following popular memes is capital earned, to say nothing of the abject frustration of incinerated options \u003Ca href=\"https:\/\/www.wsj.com\/articles\/a-stock-permabear-wont-give-in-1504576920\"\u003Epremium\u003C\/a\u003E.\u003C\/span\u003E\u003Cbr \/\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003ENote: all data for this post is via Bloomberg\/author's calculations, value date 4\/30\/18.\u003C\/span\u003E"},"link":[{"rel":"replies","type":"application/atom+xml","href":"http:\/\/macro-man.blogspot.com\/feeds\/3618116463227553489\/comments\/default","title":"Post Comments"},{"rel":"replies","type":"text/html","href":"http:\/\/www.blogger.com\/comment.g?blogID=34323687\u0026postID=3618116463227553489","title":"47 Comments"},{"rel":"edit","type":"application/atom+xml","href":"http:\/\/www.blogger.com\/feeds\/34323687\/posts\/default\/3618116463227553489"},{"rel":"self","type":"application/atom+xml","href":"http:\/\/www.blogger.com\/feeds\/34323687\/posts\/default\/3618116463227553489"},{"rel":"alternate","type":"text/html","href":"http:\/\/macro-man.blogspot.com\/2018\/05\/strong-and-stable-valuations-edition.html","title":"Strong And Stable, Valuations Edition"}],"author":[{"name":{"$t":"Cackalack Capital"},"uri":{"$t":"http:\/\/www.blogger.com\/profile\/10765822411082053545"},"email":{"$t":"noreply@blogger.com"},"gd$image":{"rel":"http://schemas.google.com/g/2005#thumbnail","width":"16","height":"16","src":"https:\/\/img1.blogblog.com\/img\/b16-rounded.gif"}}],"media$thumbnail":{"xmlns$media":"http://search.yahoo.com/mrss/","url":"https:\/\/1.bp.blogspot.com\/-IK-mNJc_OEM\/Wueu1UrEXfI\/AAAAAAAAABw\/J3591SqlyiMfG5n3ikobjYbuJ_3DnaftwCLcBGAs\/s72-c\/043018%2BMM%2B1.png","height":"72","width":"72"},"thr$total":{"$t":"47"}},{"id":{"$t":"tag:blogger.com,1999:blog-34323687.post-737988298534430035"},"published":{"$t":"2018-04-27T06:16:00.000+01:00"},"updated":{"$t":"2018-04-27T06:16:41.339+01:00"},"title":{"type":"text","$t":"EFF-IOER: What's Next?"},"content":{"type":"html","$t":"\u003Cbr \/\u003E\u003Cbr \/\u003E\u003Cdiv class=\"MsoNormal\"\u003E\u003Cspan style=\"font-family: inherit;\"\u003ESame as\u0026nbsp; Cackalack Capital, this is my first post. I joined the troops after MM asked for some\u003Cspan style=\"color: blue;\"\u003E \u003C\/span\u003E\u003C\/span\u003E\u003Ca href=\"http:\/\/macro-man.blogspot.sg\/2018\/04\/help-wanted_13.html\" style=\"font-family: inherit;\"\u003E\u003Cspan style=\"color: blue;\"\u003Ehelp\u003C\/span\u003E\u003C\/a\u003E\u003Cspan style=\"font-family: inherit;\"\u003E. I am \u003C\/span\u003Ehonoured\u003Cspan style=\"font-family: inherit;\"\u003E\u0026nbsp;and thrilled to get the chance at it. Please feel free to contact me with any questions, comments, ideas at \u003Ca href=\"mailto:macrodiver1@gmail.com\"\u003Emacrodiver1@gmail.com\u003C\/a\u003E.\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv class=\"MsoNormal\"\u003E\u003Cspan style=\"font-family: inherit;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv class=\"MsoNormal\"\u003E\u003Cspan style=\"font-family: inherit;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv class=\"MsoNormal\"\u003E\u003Cspan style=\"font-family: inherit;\"\u003EAlongside the wild ride in Libor-OIS, which was the subject of a\u0026nbsp;\u003Ca href=\"http:\/\/macro-man.blogspot.sg\/2018\/04\/lois-maximus.html\" target=\"_blank\"\u003E\u003Cspan style=\"color: blue;\"\u003ECackalack\u003C\/span\u003E\u003C\/a\u003E\u0026nbsp;post, something on my radar and somewhat less discussed, apart from some short end nerds like myself, is the narrowing of the EFF-IOER\u0026nbsp;\u003C\/span\u003Espread\u0026nbsp;\u003Cspan style=\"font-family: inherit;\"\u003E( Effective Fed Funds -Interest Rate on Excess Reserves) .\u0026nbsp;\u003C\/span\u003E\u003Cbr \/\u003E\u003Cspan style=\"font-family: inherit;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv class=\"MsoNormal\"\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ca href=\"https:\/\/1.bp.blogspot.com\/-1h26__2vRqw\/WuGyQb2slsI\/AAAAAAAAABw\/VenApuzuQpMYSkG8M08iNXcNa7zGjbM9QCLcBGAs\/s1600\/eff%2Bioer.PNG\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em;\"\u003E\u003Cimg border=\"0\" data-original-height=\"283\" data-original-width=\"470\" height=\"384\" src=\"https:\/\/1.bp.blogspot.com\/-1h26__2vRqw\/WuGyQb2slsI\/AAAAAAAAABw\/VenApuzuQpMYSkG8M08iNXcNa7zGjbM9QCLcBGAs\/s640\/eff%2Bioer.PNG\" width=\"640\" \/\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cspan style=\"font-family: inherit;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv class=\"MsoNormal\"\u003E\u003Cspan style=\"font-family: inherit;\"\u003EFor 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 eyebrows.\u0026nbsp;\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv class=\"MsoNormal\"\u003E\u003Cbr \/\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ca href=\"https:\/\/3.bp.blogspot.com\/-kCtJ5cNCUPQ\/WuG1ventKdI\/AAAAAAAAAB8\/OIABICbWmbQ6NLNhihN72V9FlKHKo7oMwCLcBGAs\/s1600\/snip%2B%2528004%2529.png\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em;\"\u003E\u003Cimg border=\"0\" data-original-height=\"393\" data-original-width=\"963\" height=\"260\" src=\"https:\/\/3.bp.blogspot.com\/-kCtJ5cNCUPQ\/WuG1ventKdI\/AAAAAAAAAB8\/OIABICbWmbQ6NLNhihN72V9FlKHKo7oMwCLcBGAs\/s640\/snip%2B%2528004%2529.png\" width=\"640\" \/\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cbr \/\u003E\u003Cspan style=\"font-family: inherit;\"\u003ESome would say the Fed started shrinking its balance sheet in October last year and this is draining \u003C\/span\u003Ereserves,\u003Cspan style=\"font-family: inherit;\"\u003E\u0026nbsp;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).\u0026nbsp;\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv class=\"MsoNormal\"\u003E\u003Cspan style=\"font-family: inherit;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv class=\"MsoNormal\"\u003E\u003Cspan style=\"font-family: inherit;\"\u003EAnother culprit could be the \u003C\/span\u003Ediminishing\u003Cspan style=\"font-family: inherit;\"\u003E\u0026nbsp;weight of the standard FDIC assessment charge but here \u003C\/span\u003Eagain\u003Cspan style=\"font-family: inherit;\"\u003E\u0026nbsp;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.\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv class=\"MsoNormal\"\u003E\u003Cbr \/\u003E\u003Cspan style=\"font-family: inherit;\"\u003EWhat about Bills and Bonds issuance ? As we can see from the chart below, the Treasury cash \u003C\/span\u003Ebalance\u003Cspan style=\"font-family: inherit;\"\u003E\u0026nbsp;started to move up in December and has \u003C\/span\u003Ebeen\u003Cspan style=\"font-family: inherit;\"\u003E\u0026nbsp;on an accelerating path since then. This is due to the large Bill issuance that started then and \u003C\/span\u003Eaccelerated\u003Cspan style=\"font-family: inherit;\"\u003E\u0026nbsp;after the US budget was voted in early February. It is now sitting at 414 bios, over the \u003C\/span\u003ETreasury\u003Cspan style=\"font-family: inherit;\"\u003E\u0026nbsp;projection of 360 bios for end of June, certainly aided by this month tax receipts inflows.\u0026nbsp;\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv class=\"MsoNormal\"\u003E\u003Cspan style=\"font-family: inherit;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ca href=\"https:\/\/4.bp.blogspot.com\/-jWeXBidgpsA\/WuFUgOlCJOI\/AAAAAAAAABM\/5MWW2RnszGA91gq-Qt9GvtFsO_tL1wuVwCLcBGAs\/s1600\/Capture2.PNG\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em;\"\u003E\u003Cimg border=\"0\" data-original-height=\"356\" data-original-width=\"654\" height=\"347\" src=\"https:\/\/4.bp.blogspot.com\/-jWeXBidgpsA\/WuFUgOlCJOI\/AAAAAAAAABM\/5MWW2RnszGA91gq-Qt9GvtFsO_tL1wuVwCLcBGAs\/s640\/Capture2.PNG\" width=\"640\" \/\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cdiv class=\"MsoNormal\"\u003E\u003Cspan style=\"font-family: inherit;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv class=\"MsoNormal\"\u003E\u003Cspan style=\"font-family: inherit;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv class=\"MsoNormal\"\u003E\u003Cbr \/\u003E\u003C\/div\u003E\u003Cdiv class=\"MsoNormal\"\u003E\u003Cspan style=\"font-family: inherit;\"\u003EThe Bill issuance is also draining reserves and alongside the \u003C\/span\u003Eincreasing\u003Cspan style=\"font-family: inherit;\"\u003E\u0026nbsp;Bond issuance it has an other side effect. It creates upside pressure on\u0026nbsp; 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.\u0026nbsp; \u0026nbsp;This is changing the relationship between the various \u003C\/span\u003Eovernight\u003Cspan style=\"font-family: inherit;\"\u003E\u0026nbsp;rates and in my view is the main driver behind the move higher in Fed Funds.\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv class=\"MsoNormal\"\u003E\u003Cspan style=\"font-family: inherit;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ca href=\"https:\/\/2.bp.blogspot.com\/-J2-wSsmGS70\/WuFa7H9qj3I\/AAAAAAAAABg\/LQ1uAvv7iBM1krWKGCEZQCV1J5Lf7gevwCLcBGAs\/s1600\/snip.png\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em;\"\u003E\u003Cimg border=\"0\" data-original-height=\"596\" data-original-width=\"1264\" height=\"299\" src=\"https:\/\/2.bp.blogspot.com\/-J2-wSsmGS70\/WuFa7H9qj3I\/AAAAAAAAABg\/LQ1uAvv7iBM1krWKGCEZQCV1J5Lf7gevwCLcBGAs\/s640\/snip.png\" width=\"640\" \/\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cdiv class=\"MsoNormal\"\u003E\u003Cspan style=\"font-family: inherit;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv class=\"MsoNormal\"\u003E\u003Cbr \/\u003E\u003C\/div\u003E\u003Cdiv class=\"MsoNormal\"\u003EThis month the Treasury has slowed down Bill issuance due to the tax receipt inflows but they will ramp it up again in May.\u0026nbsp; \u0026nbsp;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.\u003Cbr \/\u003E\u003Cbr \/\u003EGood luck,\u003Cbr \/\u003E\u003Cbr \/\u003EMD\u003C\/div\u003E\u003Cbr \/\u003E\u003Cbr \/\u003E\u003Cdiv\u003E\u003Cbr \/\u003E\u003C\/div\u003E"},"link":[{"rel":"replies","type":"application/atom+xml","href":"http:\/\/macro-man.blogspot.com\/feeds\/737988298534430035\/comments\/default","title":"Post Comments"},{"rel":"replies","type":"text/html","href":"http:\/\/www.blogger.com\/comment.g?blogID=34323687\u0026postID=737988298534430035","title":"23 Comments"},{"rel":"edit","type":"application/atom+xml","href":"http:\/\/www.blogger.com\/feeds\/34323687\/posts\/default\/737988298534430035"},{"rel":"self","type":"application/atom+xml","href":"http:\/\/www.blogger.com\/feeds\/34323687\/posts\/default\/737988298534430035"},{"rel":"alternate","type":"text/html","href":"http:\/\/macro-man.blogspot.com\/2018\/04\/eff-ioer-whats-next.html","title":"EFF-IOER: What's Next?"}],"author":[{"name":{"$t":"Anonymous"},"uri":{"$t":"http:\/\/www.blogger.com\/profile\/05759305433915605860"},"email":{"$t":"noreply@blogger.com"},"gd$image":{"rel":"http://schemas.google.com/g/2005#thumbnail","width":"16","height":"16","src":"https:\/\/img1.blogblog.com\/img\/b16-rounded.gif"}}],"media$thumbnail":{"xmlns$media":"http://search.yahoo.com/mrss/","url":"https:\/\/1.bp.blogspot.com\/-1h26__2vRqw\/WuGyQb2slsI\/AAAAAAAAABw\/VenApuzuQpMYSkG8M08iNXcNa7zGjbM9QCLcBGAs\/s72-c\/eff%2Bioer.PNG","height":"72","width":"72"},"thr$total":{"$t":"23"}},{"id":{"$t":"tag:blogger.com,1999:blog-34323687.post-1027647448182045635"},"published":{"$t":"2018-04-26T03:52:00.002+01:00"},"updated":{"$t":"2018-04-26T11:20:45.763+01:00"},"title":{"type":"text","$t":"LOIS Maximus"},"content":{"type":"html","$t":"\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003ESince this is my first post, hello! In the words most commonly used during the reign of Mike Francesa on WFAN, \u003Ca href=\"https:\/\/www.youtube.com\/watch?v=Ie1a9uyPjw0\"\u003Elong time first time\u003C\/a\u003E. I've agreed to do some posts since MM \u003Ca href=\"http:\/\/macro-man.blogspot.com\/2018\/04\/help-wanted_13.html\"\u003Ehung up the shingle\u003C\/a\u003E 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:\u0026nbsp;\u003Cspan style=\"background-color: white;\"\u003Ecackalackcap@gmail.com.\u003C\/span\u003E\u003C\/span\u003E\u003Cbr \/\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cspan style=\"background-color: white;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cspan style=\"background-color: white;\"\u003EToday 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 (\"\u003Ca href=\"http:\/\/macro-man.blogspot.com\/2018\/03\/an-exercise-in-connecting-dots-libor.html\"\u003EAn Exercise In Connecting The Dots\u003C\/a\u003E\") and Shawn (\"\u003Ca href=\"http:\/\/macro-man.blogspot.com\/2018\/03\/the-anatomy-of-libor-panic-new-wides.html\"\u003EThe Anatomy of a LIBOR Panic\u003C\/a\u003E\" and \"\u003Ca href=\"http:\/\/macro-man.blogspot.com\/2018\/03\/why-is-libor-moving-higher.html\"\u003EWhy Is LIBOR Moving Higher\u003C\/a\u003E\"). I'll assume given that background readers are basically familiar with the story.\u003C\/span\u003E\u003C\/span\u003E\u003Cbr \/\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cspan style=\"background-color: white;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003Cbr \/\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ca href=\"https:\/\/4.bp.blogspot.com\/-WTbtLd4iN_k\/WuD2_wLhi6I\/AAAAAAAAAAM\/SnYimvDkJ8IUYZ0Y8mrxWJEseiZgbCAQQCLcBGAs\/s1600\/042518%2BMM%2B1.png\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cimg border=\"0\" data-original-height=\"800\" data-original-width=\"910\" height=\"561\" src=\"https:\/\/4.bp.blogspot.com\/-WTbtLd4iN_k\/WuD2_wLhi6I\/AAAAAAAAAAM\/SnYimvDkJ8IUYZ0Y8mrxWJEseiZgbCAQQCLcBGAs\/s640\/042518%2BMM%2B1.png\" width=\"640\" \/\u003E\u003C\/span\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cspan style=\"background-color: white;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cspan style=\"background-color: white;\"\u003ESince peaking on April 6th at 59.6 bps, the 3m LIBOR-OIS spread has slipped below 55 bps.\u0026nbsp; 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.\u003C\/span\u003E\u003C\/span\u003E\u003Cbr \/\u003E\u003Cbr \/\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ca href=\"https:\/\/3.bp.blogspot.com\/-RPknjIaQxOQ\/WuD4W8idRiI\/AAAAAAAAAAY\/P_4KgeDBY3cV-Ljw6V5gYDpqpGu8YhT7wCLcBGAs\/s1600\/042518%2BMM%2B2.png\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cimg border=\"0\" data-original-height=\"794\" data-original-width=\"909\" height=\"558\" src=\"https:\/\/3.bp.blogspot.com\/-RPknjIaQxOQ\/WuD4W8idRiI\/AAAAAAAAAAY\/P_4KgeDBY3cV-Ljw6V5gYDpqpGu8YhT7wCLcBGAs\/s640\/042518%2BMM%2B2.png\" width=\"640\" \/\u003E\u003C\/span\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cspan style=\"background-color: white;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cspan style=\"background-color: white;\"\u003EThis 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.\u0026nbsp;\u003C\/span\u003E\u003C\/span\u003E\u003Cbr \/\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cspan style=\"background-color: white;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cspan style=\"background-color: white;\"\u003EThat all sounds boffo for USD! Unfortunately, it's not that simple. Offshore assets were offshore on paper only. For instance, see \u003Ca href=\"https:\/\/www.bloomberg.com\/news\/articles\/2017-05-04\/apple-buys-more-company-debt-than-the-world-s-biggest-bond-funds\"\u003Ethe tale of Braeburn\u003C\/a\u003E, Apple's Reno, Nevada-based \u003Cstrike\u003Ecredit mutual fund\u003C\/strike\u003E 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.\u003C\/span\u003E\u003C\/span\u003E\u003Cbr \/\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cspan style=\"background-color: white;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cspan style=\"background-color: white;\"\u003EIt 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.\u003C\/span\u003E\u003C\/span\u003E\u003Cbr \/\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cspan style=\"background-color: white;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003Cbr \/\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003C\/div\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003C\/div\u003E\u003Cbr \/\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ca href=\"https:\/\/4.bp.blogspot.com\/-voH4iFi4Bf0\/WuD9Ah6s7qI\/AAAAAAAAAAs\/0x-v_bzV1S0kfiQlLCkL_zKp2k9RqE9UACLcBGAs\/s1600\/042518%2BMM%2B4.png\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cimg border=\"0\" data-original-height=\"406\" data-original-width=\"686\" height=\"378\" src=\"https:\/\/4.bp.blogspot.com\/-voH4iFi4Bf0\/WuD9Ah6s7qI\/AAAAAAAAAAs\/0x-v_bzV1S0kfiQlLCkL_zKp2k9RqE9UACLcBGAs\/s640\/042518%2BMM%2B4.png\" width=\"640\" \/\u003E\u003C\/span\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cspan style=\"background-color: white;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cspan style=\"background-color: white;\"\u003EIn 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.\u003C\/span\u003E\u003C\/span\u003E\u003Cbr \/\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cspan style=\"background-color: white;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003Cbr \/\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ca href=\"https:\/\/3.bp.blogspot.com\/-P_lp-dPTWV8\/WuD_UjtDJVI\/AAAAAAAAAA4\/_HkiW8FG38krm8rjnSvwAT__Ddhu3K8eACLcBGAs\/s1600\/042518%2BMM%2B5.png\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cimg border=\"0\" data-original-height=\"796\" data-original-width=\"909\" height=\"560\" src=\"https:\/\/3.bp.blogspot.com\/-P_lp-dPTWV8\/WuD_UjtDJVI\/AAAAAAAAAA4\/_HkiW8FG38krm8rjnSvwAT__Ddhu3K8eACLcBGAs\/s640\/042518%2BMM%2B5.png\" width=\"640\" \/\u003E\u003C\/span\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cspan style=\"background-color: white;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cspan style=\"background-color: white;\"\u003EThere's one more piece to this story. FTAV has done a good job \u003Ca href=\"https:\/\/ftalphaville.ft.com\/2018\/03\/23\/1521832181000\/Cross-currency-basis-feels-the-BEAT\/\"\u003Ecovering\u003C\/a\u003E Credit Suisse's Zoltan Poszar's \u003Ca href=\"https:\/\/plus.credit-suisse.com\/rpc4\/ravDocView?docid=V7btnA2AN-VHSK\"\u003Etheory\u003C\/a\u003E 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.\u003C\/span\u003E\u003C\/span\u003E\u003Cbr \/\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cspan style=\"background-color: white;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003Cbr \/\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003C\/div\u003E\u003Cbr \/\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ca href=\"https:\/\/4.bp.blogspot.com\/-5m1H4ptvt6E\/WuEe2CFB_dI\/AAAAAAAAABI\/LQdBxJePh4sh3ylRr_Yi-KJAx-FFf2ZZQCLcBGAs\/s1600\/042518%2BMM%2B6.png\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cimg border=\"0\" data-original-height=\"366\" data-original-width=\"620\" src=\"https:\/\/4.bp.blogspot.com\/-5m1H4ptvt6E\/WuEe2CFB_dI\/AAAAAAAAABI\/LQdBxJePh4sh3ylRr_Yi-KJAx-FFf2ZZQCLcBGAs\/s1600\/042518%2BMM%2B6.png\" \/\u003E\u003C\/span\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cbr \/\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003EThere'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!\u003C\/span\u003E\u003Cbr \/\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003Cbr \/\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ca href=\"https:\/\/2.bp.blogspot.com\/-nKT5xO1MS-s\/WuEe2BMok8I\/AAAAAAAAABM\/9cm59aplYtIPsHxocLeXqgGWLQYmN13awCLcBGAs\/s1600\/042518%2BMM%2B7.png\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cimg border=\"0\" data-original-height=\"402\" data-original-width=\"680\" height=\"378\" src=\"https:\/\/2.bp.blogspot.com\/-nKT5xO1MS-s\/WuEe2BMok8I\/AAAAAAAAABM\/9cm59aplYtIPsHxocLeXqgGWLQYmN13awCLcBGAs\/s640\/042518%2BMM%2B7.png\" width=\"640\" \/\u003E\u003C\/span\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cspan style=\"background-color: white;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cspan style=\"background-color: white;\"\u003ESo, 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.\u0026nbsp;\u003C\/span\u003E\u003C\/span\u003E\u003Cbr \/\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cspan style=\"background-color: white;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cspan style=\"background-color: white;\"\u003EThe 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 \u003Ci\u003Eexactly\u003C\/i\u003E\u0026nbsp;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.\u003C\/span\u003E\u003C\/span\u003E\u003Cbr \/\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cspan style=\"background-color: white;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003Cbr \/\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ca href=\"https:\/\/1.bp.blogspot.com\/-G5vW8pv03Dk\/WuEk7plkpqI\/AAAAAAAAABg\/BD7wMu8F1IAIMFpZ0Dl2gZF7h8TG_NgzgCLcBGAs\/s1600\/042518%2BMM8.png\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em;\"\u003E\u003Cimg border=\"0\" data-original-height=\"363\" data-original-width=\"680\" height=\"341\" src=\"https:\/\/1.bp.blogspot.com\/-G5vW8pv03Dk\/WuEk7plkpqI\/AAAAAAAAABg\/BD7wMu8F1IAIMFpZ0Dl2gZF7h8TG_NgzgCLcBGAs\/s640\/042518%2BMM8.png\" width=\"640\" \/\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cspan style=\"background-color: white;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cspan style=\"background-color: white;\"\u003EAstute 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!\u003C\/span\u003E\u003C\/span\u003E\u003Cbr \/\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cspan style=\"background-color: white;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot; , \u0026quot;helvetica\u0026quot; , sans-serif;\"\u003E\u003Cspan style=\"background-color: white;\"\u003E\u003Cb\u003EEdit\u003C\/b\u003E: An astute reader has pointed out that to get a perfect hedge ratio of $125 DV01 per leg (technically $125 ED and $125.01 FF) you would need to buy 10 EDs for every 3 of each FF (6 total), versus the 4:(1+1) ratio advocated above. That is correct, and if you want to add the extra size, it's probably the best way to go about it.\u003C\/span\u003E\u003C\/span\u003E"},"link":[{"rel":"replies","type":"application/atom+xml","href":"http:\/\/macro-man.blogspot.com\/feeds\/1027647448182045635\/comments\/default","title":"Post Comments"},{"rel":"replies","type":"text/html","href":"http:\/\/www.blogger.com\/comment.g?blogID=34323687\u0026postID=1027647448182045635","title":"14 Comments"},{"rel":"edit","type":"application/atom+xml","href":"http:\/\/www.blogger.com\/feeds\/34323687\/posts\/default\/1027647448182045635"},{"rel":"self","type":"application/atom+xml","href":"http:\/\/www.blogger.com\/feeds\/34323687\/posts\/default\/1027647448182045635"},{"rel":"alternate","type":"text/html","href":"http:\/\/macro-man.blogspot.com\/2018\/04\/lois-maximus.html","title":"LOIS Maximus"}],"author":[{"name":{"$t":"Cackalack Capital"},"uri":{"$t":"http:\/\/www.blogger.com\/profile\/10765822411082053545"},"email":{"$t":"noreply@blogger.com"},"gd$image":{"rel":"http://schemas.google.com/g/2005#thumbnail","width":"16","height":"16","src":"https:\/\/img1.blogblog.com\/img\/b16-rounded.gif"}}],"media$thumbnail":{"xmlns$media":"http://search.yahoo.com/mrss/","url":"https:\/\/4.bp.blogspot.com\/-WTbtLd4iN_k\/WuD2_wLhi6I\/AAAAAAAAAAM\/SnYimvDkJ8IUYZ0Y8mrxWJEseiZgbCAQQCLcBGAs\/s72-c\/042518%2BMM%2B1.png","height":"72","width":"72"},"thr$total":{"$t":"14"}},{"id":{"$t":"tag:blogger.com,1999:blog-34323687.post-1984131208267970995"},"published":{"$t":"2018-04-25T19:37:00.002+01:00"},"updated":{"$t":"2018-04-27T17:07:40.939+01:00"},"title":{"type":"text","$t":"One Sour Kiwi: Yours! On Another Clip of NZD"},"content":{"type":"html","$t":"As we have discussed in the past, the dollar is finally bottoming. Perhaps the market is finally starting to care about real yield differentials again.\u003Cbr \/\u003E\u003Cbr \/\u003EIf you thought this dollar move \"has legs\" to run, what should you short on the other side of the dollar?\u003Cbr \/\u003E\u003Cbr \/\u003EI think NZD is a prime candidate to be short.\u003Cbr \/\u003E\u003Cbr \/\u003E\u003Cbr \/\u003E\u003Cb\u003E\u003Ci\u003EFor those \"big picture\" and \"picture only\" people\u003C\/i\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cbr \/\u003ELet's be lazy and consult the big picture charts - looking at both the weekly and monthly.\u003Cbr \/\u003E\u003Cbr \/\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ca href=\"https:\/\/2.bp.blogspot.com\/-T5yqX_-kB2Q\/Wt9uZEkNThI\/AAAAAAAAAqA\/c97VVk1EEcoiq5gVMKB7N8n9FZ1fNdnSQCLcBGAs\/s1600\/20180424%2BNZD%2BWeekly.PNG\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em;\"\u003E\u003Cimg border=\"0\" data-original-height=\"608\" data-original-width=\"1222\" height=\"198\" src=\"https:\/\/2.bp.blogspot.com\/-T5yqX_-kB2Q\/Wt9uZEkNThI\/AAAAAAAAAqA\/c97VVk1EEcoiq5gVMKB7N8n9FZ1fNdnSQCLcBGAs\/s400\/20180424%2BNZD%2BWeekly.PNG\" width=\"400\" \/\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cbr \/\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ca href=\"https:\/\/1.bp.blogspot.com\/-rYE4pJelsl0\/Wt9uZdb4IbI\/AAAAAAAAAqE\/GMu55ZVprx89abcrUoN3paq-WItZV46DwCLcBGAs\/s1600\/20180424%2BNZD%2BMonthly.PNG\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em;\"\u003E\u003Cimg border=\"0\" data-original-height=\"460\" data-original-width=\"1231\" height=\"147\" src=\"https:\/\/1.bp.blogspot.com\/-rYE4pJelsl0\/Wt9uZdb4IbI\/AAAAAAAAAqE\/GMu55ZVprx89abcrUoN3paq-WItZV46DwCLcBGAs\/s400\/20180424%2BNZD%2BMonthly.PNG\" width=\"400\" \/\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cbr \/\u003EOn 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.\u003Cbr \/\u003E\u003Cbr \/\u003E\u003Cbr \/\u003E\u003Cb\u003E\u003Ci\u003EFundamentally, why is the Kiwi no longer sweet?\u003C\/i\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cbr \/\u003ELooking under the hood, I have identified potential fundamental drivers behind this chart.\u003Cbr \/\u003E\u003Cbr \/\u003ENZD\/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.\u003Cbr \/\u003E\u003Cbr \/\u003EThat 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.\u003Cbr \/\u003E\u003Cbr \/\u003ESo the Fed now is raising rates with the US economy ripping while the opposite is occurring\u0026nbsp;in New Zealand.\u003Cbr \/\u003E\u003Cbr \/\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ca href=\"https:\/\/2.bp.blogspot.com\/-Y_9c4Y3wnPA\/Wt9zk0uWo4I\/AAAAAAAAAqY\/YK9F7ZtbVH84-qrec2u9dkrZJu1ek5HdQCLcBGAs\/s1600\/20180424%2BUS%2Bvs%2BNZ%2BGDP.PNG\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em;\"\u003E\u003Cimg border=\"0\" data-original-height=\"617\" data-original-width=\"1012\" height=\"390\" src=\"https:\/\/2.bp.blogspot.com\/-Y_9c4Y3wnPA\/Wt9zk0uWo4I\/AAAAAAAAAqY\/YK9F7ZtbVH84-qrec2u9dkrZJu1ek5HdQCLcBGAs\/s640\/20180424%2BUS%2Bvs%2BNZ%2BGDP.PNG\" width=\"640\" \/\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cbr \/\u003E\u003Cbr \/\u003EMost 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.\u003Cbr \/\u003E\u003Cbr \/\u003ENonetheless, 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.\u003Cbr \/\u003E\u003Cbr \/\u003E\u003Cbr \/\u003E\u003Cb\u003E\u003Ci\u003EA sour future\u003C\/i\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cbr \/\u003EAt this juncture, the market should understand these dynamics mentioned above. So what can we look forward to?\u003Cbr \/\u003E\u003Cbr \/\u003EWell, first I personally believe the \u003Ca href=\"http:\/\/macro-man.blogspot.com\/2018\/03\/major-europe-fx-pairs-on-precipicethe.html\"\u003E\u003Cspan style=\"color: blue;\"\u003EUSD is bottoming for the tradeable future as noted previously\u003C\/span\u003E\u003C\/a\u003E. So there's that. For the sake of this argument, let's just assume the USD bottom and US real yields march higher.\u003Cbr \/\u003E\u003Cbr \/\u003ENow, 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.\u003Cbr \/\u003E\u003Cbr \/\u003E\u003Cblockquote class=\"tr_bq\"\u003E\u003Cdiv style=\"background-color: white; border: 0px; color: #444444; font-family: \u0026quot;Open Sans\u0026quot;, 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;\"\u003E[Jacinda Ardern] says GDP per capita is \"barely growing\" and unemployment is stuck at 5% but she says it should be below 4%.\u003C\/div\u003E\u003Cdiv style=\"background-color: white; border: 0px; color: #444444; font-family: \u0026quot;Open Sans\u0026quot;, 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;\"\u003EThis is because, she says, the economy has become more geared toward\u0026nbsp;speculation and extraction\u0026nbsp;than value-added exports.\u003C\/div\u003E\u003Cdiv style=\"background-color: white; border: 0px; color: #444444; font-family: \u0026quot;Open Sans\u0026quot;, 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;\"\u003E\"Low wages aren’t simply a problem for low-wage workers, they are a problem for businesses and the economy.\"\u003C\/div\u003E\u003Cdiv style=\"background-color: white; border: 0px; color: #444444; font-family: \u0026quot;Open Sans\u0026quot;, 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;\"\u003EMs Ardern says under a Labour\/NZ First government, \"we can finally have fair wages.\"\u003C\/div\u003E\u003C\/blockquote\u003EFrom \u003Ca href=\"http:\/\/www.ozynews.com\/2017\/10\/25\/jacinda-ardern-says-unemployment-should-be-below-4\/\"\u003E\u003Cspan style=\"color: blue;\"\u003Ethat article\u003C\/span\u003E\u003C\/a\u003E 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.\u003Cbr \/\u003E\u003Cbr \/\u003EAs 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 \u003Ca 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\"\u003E\u003Cspan style=\"color: blue;\"\u003Ehe has stated there will be no change in policy bias\u003C\/span\u003E\u003C\/a\u003E, I'm not convinced.\u003Cbr \/\u003E\u003Cbr \/\u003EWith 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.\u003Cbr \/\u003E\u003Cbr \/\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ca href=\"https:\/\/2.bp.blogspot.com\/-af2zHTZEqEw\/Wt-C_kPx15I\/AAAAAAAAAqo\/Cuyn7GuxgKIUFhBbjGxH8npVu_jz0xZBgCLcBGAs\/s1600\/20180424%2BNZ%2BCPI%2Bwith%2BForecast.PNG\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em;\"\u003E\u003Cimg border=\"0\" data-original-height=\"394\" data-original-width=\"885\" height=\"283\" src=\"https:\/\/2.bp.blogspot.com\/-af2zHTZEqEw\/Wt-C_kPx15I\/AAAAAAAAAqo\/Cuyn7GuxgKIUFhBbjGxH8npVu_jz0xZBgCLcBGAs\/s640\/20180424%2BNZ%2BCPI%2Bwith%2BForecast.PNG\" width=\"640\" \/\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cbr \/\u003EIn addition, Jacinda wants unemployment lower! Like 3% lows. Let's take a look.\u003Cbr \/\u003E\u003Cbr \/\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ca href=\"https:\/\/4.bp.blogspot.com\/-gXpLM7Qlfvs\/WuDIfWmCBQI\/AAAAAAAAArg\/eLh1BqQza9AReHL38A2ZcXhAi-C4O-I-QCLcBGAs\/s1600\/20180425%2BNZ%2BUnemployment%2BTrend.PNG\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em;\"\u003E\u003Cimg border=\"0\" data-original-height=\"810\" data-original-width=\"1600\" height=\"324\" src=\"https:\/\/4.bp.blogspot.com\/-gXpLM7Qlfvs\/WuDIfWmCBQI\/AAAAAAAAArg\/eLh1BqQza9AReHL38A2ZcXhAi-C4O-I-QCLcBGAs\/s640\/20180425%2BNZ%2BUnemployment%2BTrend.PNG\" width=\"640\" \/\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cbr \/\u003EAssuming 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.\u003Cbr \/\u003E\u003Cbr \/\u003EBecause when you look at growth:\u003Cbr \/\u003E\u003Cbr \/\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ca href=\"https:\/\/2.bp.blogspot.com\/-s6kasygmfb4\/WuDJR4Yp_oI\/AAAAAAAAAro\/p_spbLUQWwo0a7I7-HgmUnrPc6sz97z9wCLcBGAs\/s1600\/20180425%2BNZ%2BGDP%2Bvs%2BSurvey.PNG\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em;\"\u003E\u003Cimg border=\"0\" data-original-height=\"816\" data-original-width=\"1600\" height=\"326\" src=\"https:\/\/2.bp.blogspot.com\/-s6kasygmfb4\/WuDJR4Yp_oI\/AAAAAAAAAro\/p_spbLUQWwo0a7I7-HgmUnrPc6sz97z9wCLcBGAs\/s640\/20180425%2BNZ%2BGDP%2Bvs%2BSurvey.PNG\" width=\"640\" \/\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cbr \/\u003ERegardless of what the IMF thinks they see in their projection, growth to me has started looking like it has become stale and flaccid.\u003Cbr \/\u003E\u003Cbr \/\u003EWith regard to rates: the OIS curve is still 75bps higher a\u0026nbsp; year out versus the current RBNZ target rate of 1.75%.\u0026nbsp;This could be too high if you assume they can't raise them and might actually have to lower them.\u003Cbr \/\u003E\u003Cbr \/\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ca href=\"https:\/\/2.bp.blogspot.com\/-RfM6GAHiZ34\/WuC5ndjLLgI\/AAAAAAAAArQ\/3mo93srmSf0SgKmsCgIY_4GN-6m83tidACLcBGAs\/s1600\/20180425%2BNew%2BZealand%2BOIS.PNG\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em;\"\u003E\u003Cimg border=\"0\" data-original-height=\"836\" data-original-width=\"1600\" height=\"334\" src=\"https:\/\/2.bp.blogspot.com\/-RfM6GAHiZ34\/WuC5ndjLLgI\/AAAAAAAAArQ\/3mo93srmSf0SgKmsCgIY_4GN-6m83tidACLcBGAs\/s640\/20180425%2BNew%2BZealand%2BOIS.PNG\" width=\"640\" \/\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cbr \/\u003E\u003Cbr \/\u003ESubsequently, in REER terms, NZD in a vacuum is still somewhat expensive and could easily depreciate 10 to 15% further before it becomes historically cheap.\u003Cbr \/\u003E\u003Cbr \/\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ca href=\"https:\/\/4.bp.blogspot.com\/-KuCJkUypfuI\/WuCeB8QXyOI\/AAAAAAAAArA\/_yRm1UeEEQwLlEgg3h8mX5oRu4CdOaSBwCLcBGAs\/s1600\/20180424%2BNZD%2BREER.PNG\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em;\"\u003E\u003Cimg border=\"0\" data-original-height=\"808\" data-original-width=\"1600\" height=\"322\" src=\"https:\/\/4.bp.blogspot.com\/-KuCJkUypfuI\/WuCeB8QXyOI\/AAAAAAAAArA\/_yRm1UeEEQwLlEgg3h8mX5oRu4CdOaSBwCLcBGAs\/s640\/20180424%2BNZD%2BREER.PNG\" width=\"640\" \/\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cbr \/\u003EAll 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!\"\u003Cbr \/\u003E\u003Cbr \/\u003EGood luck as always,\u003Cbr \/\u003E\u003Cbr \/\u003EDR"},"link":[{"rel":"replies","type":"application/atom+xml","href":"http:\/\/macro-man.blogspot.com\/feeds\/1984131208267970995\/comments\/default","title":"Post Comments"},{"rel":"replies","type":"text/html","href":"http:\/\/www.blogger.com\/comment.g?blogID=34323687\u0026postID=1984131208267970995","title":"11 Comments"},{"rel":"edit","type":"application/atom+xml","href":"http:\/\/www.blogger.com\/feeds\/34323687\/posts\/default\/1984131208267970995"},{"rel":"self","type":"application/atom+xml","href":"http:\/\/www.blogger.com\/feeds\/34323687\/posts\/default\/1984131208267970995"},{"rel":"alternate","type":"text/html","href":"http:\/\/macro-man.blogspot.com\/2018\/04\/one-sour-kiwi-yours-on-another-clip-of.html","title":"One Sour Kiwi: Yours! On Another Clip of NZD"}],"author":[{"name":{"$t":"Macro Clown"},"uri":{"$t":"http:\/\/www.blogger.com\/profile\/17196568155114537578"},"email":{"$t":"noreply@blogger.com"},"gd$image":{"rel":"http://schemas.google.com/g/2005#thumbnail","width":"16","height":"16","src":"https:\/\/img1.blogblog.com\/img\/b16-rounded.gif"}}],"media$thumbnail":{"xmlns$media":"http://search.yahoo.com/mrss/","url":"https:\/\/2.bp.blogspot.com\/-T5yqX_-kB2Q\/Wt9uZEkNThI\/AAAAAAAAAqA\/c97VVk1EEcoiq5gVMKB7N8n9FZ1fNdnSQCLcBGAs\/s72-c\/20180424%2BNZD%2BWeekly.PNG","height":"72","width":"72"},"thr$total":{"$t":"11"}},{"id":{"$t":"tag:blogger.com,1999:blog-34323687.post-2189782696956386090"},"published":{"$t":"2018-04-24T17:37:00.002+01:00"},"updated":{"$t":"2018-04-24T19:52:03.362+01:00"},"title":{"type":"text","$t":"Gold Hedge Not Working?"},"content":{"type":"html","$t":"A couple of quick things today:\u003Cbr \/\u003E\u003Cbr \/\u003E1) 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.\u003Cbr \/\u003E\u003Cbr \/\u003EI've also\u0026nbsp;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:\u0026nbsp;mrmacro -at- gmail.com\u003Cbr \/\u003E\u003Cbr \/\u003E2) 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.\u003Cbr \/\u003E\u003Cbr \/\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ca href=\"https:\/\/4.bp.blogspot.com\/-i6KTiLgB1NE\/Wt9R7yGOYjI\/AAAAAAAAApk\/-YTiOGgVFUUiGFthhh4afxF1q_JmzJt2QCLcBGAs\/s1600\/20180424%2BGold%2Bvs%2BBreakeven%2BBreak.PNG\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em;\"\u003E\u003Cimg border=\"0\" data-original-height=\"670\" data-original-width=\"1175\" height=\"364\" src=\"https:\/\/4.bp.blogspot.com\/-i6KTiLgB1NE\/Wt9R7yGOYjI\/AAAAAAAAApk\/-YTiOGgVFUUiGFthhh4afxF1q_JmzJt2QCLcBGAs\/s640\/20180424%2BGold%2Bvs%2BBreakeven%2BBreak.PNG\" width=\"640\" \/\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cbr \/\u003EI've done a more in-depth\u0026nbsp;\u003Ca href=\"http:\/\/macro-man.blogspot.com\/2017\/11\/case-study-can-gold-rally-along-with.html\"\u003E\u003Cspan style=\"color: blue;\"\u003Estudy on \u003Cspan id=\"goog_1238512131\"\u003E\u003C\/span\u003Egold as an inflation hedge in a past post here\u003C\/span\u003E\u003C\/a\u003E\u003Cspan id=\"goog_1238512132\"\u003E\u003C\/span\u003E. I wanted to reemphasize some of those dynamics,\u0026nbsp;as they seem to be at work.\u003Cbr \/\u003E\u003Cbr \/\u003EMany 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.\u003Cbr \/\u003E\u003Cbr \/\u003EConversely, 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,\u0026nbsp;in essence, be witnessing a market expansion of inflation expectations.\u003Cbr \/\u003E\u003Cbr \/\u003EHowever, as previously mentioned, the rising real yield would be a damper on Gold prices.\u003Cbr \/\u003E\u003Cbr \/\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ca href=\"https:\/\/4.bp.blogspot.com\/-fRBwb4I94jY\/Wt9VSKpabHI\/AAAAAAAAApw\/foesm7x1gH42j0qubrlUDg9G2C555qiiACLcBGAs\/s1600\/20180424%2B10yr%2BReal%2BYield.PNG\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em;\"\u003E\u003Cimg border=\"0\" data-original-height=\"588\" data-original-width=\"1139\" height=\"329\" src=\"https:\/\/4.bp.blogspot.com\/-fRBwb4I94jY\/Wt9VSKpabHI\/AAAAAAAAApw\/foesm7x1gH42j0qubrlUDg9G2C555qiiACLcBGAs\/s640\/20180424%2B10yr%2BReal%2BYield.PNG\" width=\"640\" \/\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cbr \/\u003E\u003Cbr \/\u003EThe 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.\u0026nbsp; For example:\u003Cbr \/\u003E\u003Ci\u003E\u003Cbr \/\u003E\u003C\/i\u003E \u003Ci\u003E- Imagine a world with persistently rising inflation (this scenario is much less controversial \u003Cspan style=\"color: blue;\"\u003E\u003Ca href=\"http:\/\/macro-man.blogspot.com\/2017\/09\/soapbox-thought-piece-on-long-term-view.html\"\u003E\u003Cspan style=\"color: blue;\"\u003Enow than even 6 months ago\u003C\/span\u003E)\u003C\/a\u003E.\u0026nbsp;\u003C\/span\u003E\u003C\/i\u003E\u003Cbr \/\u003E\u003Ci\u003E- Central banks are now inclined to lean on the hawkish side to combat inflation (this belief is \u003Ca href=\"http:\/\/macro-man.blogspot.com\/2017\/06\/trumps-fed_14.html\"\u003E\u003Cspan style=\"color: blue;\"\u003Emuch more prevalent now than even a year ago\u003C\/span\u003E\u003C\/a\u003E).\u0026nbsp;\u003C\/i\u003E\u003Cbr \/\u003E\u003Ci\u003E- 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 (\u003Ca href=\"https:\/\/www.reuters.com\/article\/us-usa-auction-allotment\/foreigners-pull-back-in-week-of-record-treasuries-supply-idUSKBN1HG2YV\"\u003E\u003Cspan style=\"color: blue;\"\u003Eincreased treasury issuances\u0026nbsp;for example\u003C\/span\u003E\u003C\/a\u003E), and rising inflation expectations, the bond market finally has the \"ah ha!\" moment by selling nominals en mass.\u0026nbsp;\u003C\/i\u003E\u003Cbr \/\u003E\u003Cb\u003E\u003Ci\u003E- 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.\u003C\/i\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cb\u003E\u003Ci\u003E\u003Cbr \/\u003E\u003C\/i\u003E\u003C\/b\u003E \u003Ci\u003EThe end result? Lower gold prices and higher breakeven inflation.\u003C\/i\u003E\u003Cbr \/\u003E\u003Cbr \/\u003EAll-in-all, gold can be a good inflation hedge at certain times, but buyer beware - warning signs are evident.\u003Cbr \/\u003E\u003Cbr \/\u003EGood luck,\u003Cbr \/\u003E\u003Cbr \/\u003EDR\u003Cbr \/\u003E\u003Cbr \/\u003E\u003Cbr \/\u003E\u003Cbr \/\u003E"},"link":[{"rel":"replies","type":"application/atom+xml","href":"http:\/\/macro-man.blogspot.com\/feeds\/2189782696956386090\/comments\/default","title":"Post Comments"},{"rel":"replies","type":"text/html","href":"http:\/\/www.blogger.com\/comment.g?blogID=34323687\u0026postID=2189782696956386090","title":"18 Comments"},{"rel":"edit","type":"application/atom+xml","href":"http:\/\/www.blogger.com\/feeds\/34323687\/posts\/default\/2189782696956386090"},{"rel":"self","type":"application/atom+xml","href":"http:\/\/www.blogger.com\/feeds\/34323687\/posts\/default\/2189782696956386090"},{"rel":"alternate","type":"text/html","href":"http:\/\/macro-man.blogspot.com\/2018\/04\/gold-hedge-not-working.html","title":"Gold Hedge Not Working?"}],"author":[{"name":{"$t":"Macro Clown"},"uri":{"$t":"http:\/\/www.blogger.com\/profile\/17196568155114537578"},"email":{"$t":"noreply@blogger.com"},"gd$image":{"rel":"http://schemas.google.com/g/2005#thumbnail","width":"16","height":"16","src":"https:\/\/img1.blogblog.com\/img\/b16-rounded.gif"}}],"media$thumbnail":{"xmlns$media":"http://search.yahoo.com/mrss/","url":"https:\/\/4.bp.blogspot.com\/-i6KTiLgB1NE\/Wt9R7yGOYjI\/AAAAAAAAApk\/-YTiOGgVFUUiGFthhh4afxF1q_JmzJt2QCLcBGAs\/s72-c\/20180424%2BGold%2Bvs%2BBreakeven%2BBreak.PNG","height":"72","width":"72"},"thr$total":{"$t":"18"}},{"id":{"$t":"tag:blogger.com,1999:blog-34323687.post-6989646313872123932"},"published":{"$t":"2018-04-13T16:04:00.002+01:00"},"updated":{"$t":"2018-04-13T16:04:36.398+01:00"},"title":{"type":"text","$t":"Help Wanted"},"content":{"type":"html","$t":"Well, as you can see from the post below there now a vacancy at the  helm of the Good Ship MM.\u0026nbsp; 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.\u003Cbr \/\u003E\u003Cbr \/\u003EHowever,  his gain (and the blog's loss) could also be yours!\u0026nbsp; I certainly  derived a great deal of utility from the authorship of this space, and  as you can see Shawn did as well.\u0026nbsp;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 \u003Cstrike\u003EDread Pirate Roberts\u003C\/strike\u003E Macro Man is close to unparalleled.\u003Cbr \/\u003E\u003Cbr \/\u003EAnd besides, check out these great benefits:\u003Cbr \/\u003E\u003Cbr \/\u003E* Salary:\u0026nbsp;\u0026nbsp; $0\u003Cbr \/\u003E* Health\/vision\/dental: None\u003Cbr \/\u003E*401k: None\u003Cbr \/\u003E* Vacation: At your discretion!\u003Cbr \/\u003E\u003Cbr \/\u003EIn  seriousness, if you are interested in taking up Shawn's mantle,  particularly if you're an experienced punter between gigs, please hit me  up at\u0026nbsp; mrmacro -at- gmail.com.\u003Cbr \/\u003E\u003Cbr \/\u003E\u003Cbr \/\u003E-The Original MM"},"link":[{"rel":"replies","type":"application/atom+xml","href":"http:\/\/macro-man.blogspot.com\/feeds\/6989646313872123932\/comments\/default","title":"Post Comments"},{"rel":"replies","type":"text/html","href":"http:\/\/www.blogger.com\/comment.g?blogID=34323687\u0026postID=6989646313872123932","title":"61 Comments"},{"rel":"edit","type":"application/atom+xml","href":"http:\/\/www.blogger.com\/feeds\/34323687\/posts\/default\/6989646313872123932"},{"rel":"self","type":"application/atom+xml","href":"http:\/\/www.blogger.com\/feeds\/34323687\/posts\/default\/6989646313872123932"},{"rel":"alternate","type":"text/html","href":"http:\/\/macro-man.blogspot.com\/2018\/04\/help-wanted_13.html","title":"Help Wanted"}],"author":[{"name":{"$t":"Macro Man"},"uri":{"$t":"http:\/\/www.blogger.com\/profile\/12324967552369915949"},"email":{"$t":"noreply@blogger.com"},"gd$image":{"rel":"http://schemas.google.com/g/2005#thumbnail","width":"16","height":"16","src":"https:\/\/img1.blogblog.com\/img\/b16-rounded.gif"}}],"thr$total":{"$t":"61"}},{"id":{"$t":"tag:blogger.com,1999:blog-34323687.post-6580497190425622750"},"published":{"$t":"2018-04-12T18:00:00.000+01:00"},"updated":{"$t":"2018-04-12T18:00:18.583+01:00"},"title":{"type":"text","$t":"Goodbye For Now...and Some Market Parting Shots"},"content":{"type":"html","$t":"\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cimg 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\" \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb id=\"docs-internal-guid-ffc72195-ba2f-a385-7586-39e12532853d\" style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EThere’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.” \u0026nbsp;\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003ESo 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. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EOver 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. \u0026nbsp;\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003EAs 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 \u003C\/span\u003E\u003Cspan 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;\"\u003Edifferent\u003C\/span\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E. And \u003C\/span\u003E\u003Cspan 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;\"\u003Edifferent\u003C\/span\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E is the one and only thing that generates alpha. Those contacts and new approaches to trading and investing will stay with me forever. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EWith that I’ll end the sappy stuff and leave you with a few market observations:\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E1) Inflation...still not dead! A while back I pontificated on the risk to a quick acceleration of inflation. Bill McBride over at Calculated Risk \u003C\/span\u003E\u003Ca href=\"http:\/\/www.calculatedriskblog.com\/2018\/04\/key-measures-show-inflation-increased.html\" style=\"text-decoration: none;\"\u003E\u003Cspan 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;\"\u003Eposts this chart monthly\u003C\/span\u003E\u003C\/a\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E, which incorporates some alternative measures of inflation. \u0026nbsp;\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cimg height=\"444\" src=\"https:\/\/lh4.googleusercontent.com\/xc_W9pWj14kF62m6yjGgSlkVzFksvs1bTv4SA2APLmv85QbqWKPTRDGCMxc5Kh5iejDX-jEbXLGVfRkEXs5xMCE9w5UJMhWh-i8zwZQ9vGioD48j1F7UFE8mbNk21tFqkIqf92SR\" style=\"border: none; transform: rotate(0rad);\" width=\"640\" \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EYou can see they are all ticking up...then look at my favorite alt-inflation measure, the NY Fed underlying inflation gauges: \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cimg height=\"360\" src=\"https:\/\/lh6.googleusercontent.com\/A5EczN5-5xFHlV336Vk9qCL_q1iqphynVavAI_rbF9OgZEphzojtJRa4z4VpakWZXuSJViQvOZEhC8vG5VTC60Qm1nfs41CGdtEXB5VgmJMz1LDoyExc4kshRGkbCCQmu21UGdEo\" style=\"border: none; transform: rotate(0rad);\" width=\"450\" \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EThe 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. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003ELastly, Ben Hunt over at Epsilon Theory \u003C\/span\u003E\u003Ca href=\"http:\/\/www.epsilontheory.com\/the-narrative-giveth-and-the-narrative-taketh-away\/\" style=\"text-decoration: none;\"\u003E\u003Cspan 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;\"\u003Ehad a great post earlier this week\u003C\/span\u003E\u003C\/a\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E 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. \u0026nbsp;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. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003ECombine those factors with the following: unprecedented fiscal stimulus, a tight labor market, \u003C\/span\u003E\u003C\/span\u003E\u003Cspan style=\"font-family: Arial; font-size: large; white-space: pre-wrap;\"\u003Ea 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. \u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E2) 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: \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cimg 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\" \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cimg 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\" \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cimg 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\" \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EThose 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. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003ENow, 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:\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cimg 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\" \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EDespite EURUSD trading in a very narrow range. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cimg height=\"312\" src=\"https:\/\/lh4.googleusercontent.com\/rBgFpejbVyQ31nExewhxJ1x2Xw8jlCC1x-FUNXosZhicBRgCPtKMYO6yFz7hC4z04A5GFKkrgvkPMqQAk2WuW-hfCB6Pk25YNdSI9df4sZBJga8Yrmw200aakiGJPuokNvbzvnNy\" style=\"-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);\" width=\"624\" \/\u003E\u003C\/span\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EEconomic divergence, extreme positioning and little price movement...combined with an abundance of geopolitical risks---buy USD. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EAnd 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.\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cimg 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\" \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EEM 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. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EMeanwhile, 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. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EBut 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. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003ESo 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. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003EAnd 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: \u003C\/span\u003E\u003Ca href=\"https:\/\/twitter.com\/EMinflationista\" style=\"text-decoration: none;\"\u003E\u003Cspan 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;\"\u003E@EMinflationista\u003C\/span\u003E\u003C\/a\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: Arial; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EShawn\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Ca href=\"mailto:TeamMacroMan2@gmail.com\" style=\"text-decoration: none;\"\u003E\u003Cspan 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;\"\u003E\u003Cspan style=\"font-size: large;\"\u003ETeamMacroMan2@gmail.com\u003C\/span\u003E\u003C\/span\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Ca href=\"https:\/\/twitter.com\/EMinflationista\" style=\"text-decoration: none;\"\u003E\u003Cspan 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;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E@EMinflationista\u003C\/span\u003E\u003C\/span\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cbr \/\u003E"},"link":[{"rel":"replies","type":"application/atom+xml","href":"http:\/\/macro-man.blogspot.com\/feeds\/6580497190425622750\/comments\/default","title":"Post Comments"},{"rel":"replies","type":"text/html","href":"http:\/\/www.blogger.com\/comment.g?blogID=34323687\u0026postID=6580497190425622750","title":"32 Comments"},{"rel":"edit","type":"application/atom+xml","href":"http:\/\/www.blogger.com\/feeds\/34323687\/posts\/default\/6580497190425622750"},{"rel":"self","type":"application/atom+xml","href":"http:\/\/www.blogger.com\/feeds\/34323687\/posts\/default\/6580497190425622750"},{"rel":"alternate","type":"text/html","href":"http:\/\/macro-man.blogspot.com\/2018\/04\/goodbye-for-nowand-some-market-parting.html","title":"Goodbye For Now...and Some Market Parting Shots"}],"author":[{"name":{"$t":"EM Inflationista"},"uri":{"$t":"http:\/\/www.blogger.com\/profile\/13376753485910252234"},"email":{"$t":"noreply@blogger.com"},"gd$image":{"rel":"http://schemas.google.com/g/2005#thumbnail","width":"32","height":"32","src":"\/\/4.bp.blogspot.com\/-VK2YiYEkB_o\/XI79hGr3rAI\/AAAAAAAADcc\/k0TIRG0Uww8W0ywSOtL6xguQbzOzyOm7gCK4BGAYYCw\/s113\/brazil.jpg"}}],"media$thumbnail":{"xmlns$media":"http://search.yahoo.com/mrss/","url":"https:\/\/lh5.googleusercontent.com\/L-WtiWz2H9XOxeRodfEBT0DkIHMYjs-l7ZilUne69--SE07vOz-b0jKBd8mvj0a8k--uuPYyB2Ze8p5dlUrjOaSbTYxgHOlr2jx4nZMUgk7OjRlRth1yaY-Io7N6gGLKUGx5jabD=s72-c","height":"72","width":"72"},"thr$total":{"$t":"32"}},{"id":{"$t":"tag:blogger.com,1999:blog-34323687.post-8476180327752991113"},"published":{"$t":"2018-04-04T23:16:00.001+01:00"},"updated":{"$t":"2018-04-04T23:16:17.489+01:00"},"title":{"type":"text","$t":"Reading The Tea Leaves For WTI"},"content":{"type":"html","$t":"In light of today's surprise\u0026nbsp;EIA print. I decided to revisit the oil market to try and get a feel for sentiment and overall market fundamentals.\u003Cbr \/\u003E\u003Cbr \/\u003EFirst 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.\u003Cbr \/\u003E\u003Cbr \/\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ca href=\"https:\/\/4.bp.blogspot.com\/-Ve1FCO3J-VQ\/WsU57yOTELI\/AAAAAAAAAns\/NLGIUSwAo785XY1L334nrzgvq4G0GxrsgCLcBGAs\/s1600\/20180404%2BCNBC%2BOil%2BExcerpt.PNG\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em;\"\u003E\u003Cimg border=\"0\" data-original-height=\"443\" data-original-width=\"687\" height=\"257\" src=\"https:\/\/4.bp.blogspot.com\/-Ve1FCO3J-VQ\/WsU57yOTELI\/AAAAAAAAAns\/NLGIUSwAo785XY1L334nrzgvq4G0GxrsgCLcBGAs\/s400\/20180404%2BCNBC%2BOil%2BExcerpt.PNG\" width=\"400\" \/\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cbr \/\u003EAdditionally, 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.\u003Cbr \/\u003E\u003Cbr \/\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ca href=\"https:\/\/1.bp.blogspot.com\/-DGN7liUK3lQ\/WsVIwaSzx4I\/AAAAAAAAAos\/qmk85xeT7DA4Dw_eokWtWiV7Ic54NWWVwCLcBGAs\/s1600\/20180404%2BWTI%2BPositioning.PNG\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em;\"\u003E\u003Cimg border=\"0\" data-original-height=\"483\" data-original-width=\"856\" height=\"360\" src=\"https:\/\/1.bp.blogspot.com\/-DGN7liUK3lQ\/WsVIwaSzx4I\/AAAAAAAAAos\/qmk85xeT7DA4Dw_eokWtWiV7Ic54NWWVwCLcBGAs\/s640\/20180404%2BWTI%2BPositioning.PNG\" width=\"640\" \/\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cbr \/\u003E\u003Cbr \/\u003EBut as traders, we profit from questioning the consensus. So let's dig into some fundamentals.\u003Cbr \/\u003E\u003Cbr \/\u003EOne 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\u0026nbsp;oil exports.\u003Cbr \/\u003E\u003Cbr \/\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ca href=\"https:\/\/3.bp.blogspot.com\/-jLSi-xi6JsU\/WsU_F13WRyI\/AAAAAAAAAn8\/VUyNFrWm8wgHBmFrzToO7rjdDgNaaU-OACLcBGAs\/s1600\/20180404%2BUS%2BProduction%2Bvs%2BExports.PNG\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em;\"\u003E\u003Cimg border=\"0\" data-original-height=\"572\" data-original-width=\"1012\" height=\"360\" src=\"https:\/\/3.bp.blogspot.com\/-jLSi-xi6JsU\/WsU_F13WRyI\/AAAAAAAAAn8\/VUyNFrWm8wgHBmFrzToO7rjdDgNaaU-OACLcBGAs\/s640\/20180404%2BUS%2BProduction%2Bvs%2BExports.PNG\" width=\"640\" \/\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cbr \/\u003EWe are still pumping out that stuff but are not selling as much of it? Could it be that we are simply consuming more?\u003Cbr \/\u003E\u003Cbr \/\u003EWell, it turns out that's not the case either.\u003Cbr \/\u003E\u003Cbr \/\u003EAt 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.\u003Cbr \/\u003E\u003Cbr \/\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ca href=\"https:\/\/2.bp.blogspot.com\/-qBqotHw3L-E\/WsVAJDkumUI\/AAAAAAAAAoI\/AN0iJb3G9HcIAMgyXuSwXjWcHUhUmXeegCLcBGAs\/s1600\/20180404%2BUS%2BDOE%2BInventory.PNG\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em;\"\u003E\u003Cimg border=\"0\" data-original-height=\"570\" data-original-width=\"1059\" height=\"344\" src=\"https:\/\/2.bp.blogspot.com\/-qBqotHw3L-E\/WsVAJDkumUI\/AAAAAAAAAoI\/AN0iJb3G9HcIAMgyXuSwXjWcHUhUmXeegCLcBGAs\/s640\/20180404%2BUS%2BDOE%2BInventory.PNG\" width=\"640\" \/\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Cbr \/\u003E\u003C\/div\u003EDigging 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\u0026nbsp;production decline is non-existent, I'm just saying there's no sign of it right now via the official numbers.\u003Cbr \/\u003E\u003Cbr \/\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ca href=\"https:\/\/4.bp.blogspot.com\/-I1w0NHhdxxY\/WsVB2unvtwI\/AAAAAAAAAoU\/Gui5j3t5PyMPCezA-KvRkxMXYgXZC4HrgCLcBGAs\/s1600\/20180404%2BRussia%2BProduction.PNG\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em;\"\u003E\u003Cimg border=\"0\" data-original-height=\"438\" data-original-width=\"728\" height=\"384\" src=\"https:\/\/4.bp.blogspot.com\/-I1w0NHhdxxY\/WsVB2unvtwI\/AAAAAAAAAoU\/Gui5j3t5PyMPCezA-KvRkxMXYgXZC4HrgCLcBGAs\/s640\/20180404%2BRussia%2BProduction.PNG\" width=\"640\" \/\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cbr \/\u003EOPEC 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.\u003Cbr \/\u003E\u003Cbr \/\u003EToday, 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.\u003Cbr \/\u003E\u003Cbr \/\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ca href=\"https:\/\/2.bp.blogspot.com\/-J3ZFFFTF_34\/WsVC5RmP96I\/AAAAAAAAAoc\/Hh3Pk3vJWiobCmijgxEhhiFlgncUXslhACLcBGAs\/s1600\/20180404%2BOPEC%2BMarket%2BShare.PNG\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em;\"\u003E\u003Cimg border=\"0\" data-original-height=\"475\" data-original-width=\"1475\" height=\"206\" src=\"https:\/\/2.bp.blogspot.com\/-J3ZFFFTF_34\/WsVC5RmP96I\/AAAAAAAAAoc\/Hh3Pk3vJWiobCmijgxEhhiFlgncUXslhACLcBGAs\/s640\/20180404%2BOPEC%2BMarket%2BShare.PNG\" width=\"640\" \/\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cbr \/\u003EMoving on to\u0026nbsp;the Baker Huges Rig count. This has had a meaningful recovery back to early 2015 levels.\u003Cbr \/\u003E\u003Cbr \/\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ca href=\"https:\/\/2.bp.blogspot.com\/-_lEujJCBFqE\/WsVJTdbxdTI\/AAAAAAAAAo0\/XufWDsEK6HkYVWs5jrWj4BuaLMERubjeQCLcBGAs\/s1600\/20180404%2BBaker%2BHughes%2BRig%2BCount.PNG\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em;\"\u003E\u003Cimg border=\"0\" data-original-height=\"660\" data-original-width=\"975\" height=\"432\" src=\"https:\/\/2.bp.blogspot.com\/-_lEujJCBFqE\/WsVJTdbxdTI\/AAAAAAAAAo0\/XufWDsEK6HkYVWs5jrWj4BuaLMERubjeQCLcBGAs\/s640\/20180404%2BBaker%2BHughes%2BRig%2BCount.PNG\" width=\"640\" \/\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cbr \/\u003E\u003Cbr \/\u003EFinally, from a more peripheral perspective, we have had a bursting of the sub-prime car bubble in the United States.\u003Cbr \/\u003E\u003Cbr \/\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ca href=\"https:\/\/4.bp.blogspot.com\/-qG86x2jiY4U\/WsVKkperB0I\/AAAAAAAAApA\/eqVdrXnuj4Yxq8vOXXJgJjAaWjw3TdC1QCLcBGAs\/s1600\/20180404%2BSubprime%2BAuto%2BLoan%2BLosses.PNG\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em;\"\u003E\u003Cimg border=\"0\" data-original-height=\"714\" data-original-width=\"1535\" height=\"296\" src=\"https:\/\/4.bp.blogspot.com\/-qG86x2jiY4U\/WsVKkperB0I\/AAAAAAAAApA\/eqVdrXnuj4Yxq8vOXXJgJjAaWjw3TdC1QCLcBGAs\/s640\/20180404%2BSubprime%2BAuto%2BLoan%2BLosses.PNG\" width=\"640\" \/\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cbr \/\u003ESubprime 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.\u003Cbr \/\u003E\u003Cbr \/\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ca href=\"https:\/\/2.bp.blogspot.com\/-nD8wshRNnuo\/WsVK6OvQJLI\/AAAAAAAAApE\/Wn6IeHUkNXYn7hW9LTE1C391wukfshrSACLcBGAs\/s1600\/20180404%2BVehicle%2BSales.PNG\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em;\"\u003E\u003Cimg border=\"0\" data-original-height=\"600\" data-original-width=\"1462\" height=\"262\" src=\"https:\/\/2.bp.blogspot.com\/-nD8wshRNnuo\/WsVK6OvQJLI\/AAAAAAAAApE\/Wn6IeHUkNXYn7hW9LTE1C391wukfshrSACLcBGAs\/s640\/20180404%2BVehicle%2BSales.PNG\" width=\"640\" \/\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Cbr \/\u003E\u003C\/div\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: left;\"\u003EOveral 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.\u003C\/div\u003E\u003Cdiv\u003E\u003Cbr \/\u003E\u003C\/div\u003E\u003Cb\u003EIn my opinion, each puzzle piece snaps into place this way:\u0026nbsp;\u003C\/b\u003E\u003Cbr \/\u003E\u003Cbr \/\u003E\u003Cbr \/\u003E\u003Cul\u003E\u003Cli\u003EThe production that caused the oil glut never really stopped. In fact, non-OPEC production has only increased.\u003C\/li\u003E\u003Cli\u003EThe 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.\u003C\/li\u003E\u003C\/ul\u003E\u003Ca href=\"https:\/\/2.bp.blogspot.com\/-tP010P85vbs\/WsVN8rAgr9I\/AAAAAAAAApQ\/TZLWPZhL2m08Aldq3gdT3Tp5tS9VTYZ2QCLcBGAs\/s1600\/20180404%2BOPEC%2Bvs%2BNon%2BOPEC%2BProduction%2B%2526%2BTotal%2BProduction.PNG\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em; text-align: center;\"\u003E\u003Cimg border=\"0\" data-original-height=\"857\" data-original-width=\"743\" height=\"640\" src=\"https:\/\/2.bp.blogspot.com\/-tP010P85vbs\/WsVN8rAgr9I\/AAAAAAAAApQ\/TZLWPZhL2m08Aldq3gdT3Tp5tS9VTYZ2QCLcBGAs\/s640\/20180404%2BOPEC%2Bvs%2BNon%2BOPEC%2BProduction%2B%2526%2BTotal%2BProduction.PNG\" width=\"554\" \/\u003E\u003C\/a\u003E\u003Cbr \/\u003E\u003Cbr \/\u003E\u003Cul\u003E\u003Cli\u003EAuto sales have benefited\u0026nbsp;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).\u003C\/li\u003E\u003Cli\u003EAs 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.\u0026nbsp;\u003C\/li\u003E\u003C\/ul\u003E\u003Cdiv\u003E\u003Ca href=\"https:\/\/4.bp.blogspot.com\/-rR-4OLakzPw\/WsVOAg8hjYI\/AAAAAAAAApU\/MmU_pTHqJaMB1ZmbUSpWt-wkNMo-xDPyACLcBGAs\/s1600\/20180404%2BOil%2BInventory%2Bvs%2BPx.PNG\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em; text-align: center;\"\u003E\u003Cimg border=\"0\" data-original-height=\"555\" data-original-width=\"960\" height=\"370\" src=\"https:\/\/4.bp.blogspot.com\/-rR-4OLakzPw\/WsVOAg8hjYI\/AAAAAAAAApU\/MmU_pTHqJaMB1ZmbUSpWt-wkNMo-xDPyACLcBGAs\/s640\/20180404%2BOil%2BInventory%2Bvs%2BPx.PNG\" width=\"640\" \/\u003E\u003C\/a\u003E\u003C\/div\u003E\u003Cul\u003E\u003Cli\u003EThe world still mostly thinks oil is a long, but with the aforementioned points above, it's probably to jettison that position.\u003C\/li\u003E\u003C\/ul\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Cbr \/\u003E\u003C\/div\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Cbr \/\u003E\u003C\/div\u003E\u003Cdiv\u003EWell, there you have it. Good luck out there.\u003C\/div\u003E\u003Cdiv\u003E\u003Cbr \/\u003E\u003C\/div\u003E"},"link":[{"rel":"replies","type":"application/atom+xml","href":"http:\/\/macro-man.blogspot.com\/feeds\/8476180327752991113\/comments\/default","title":"Post Comments"},{"rel":"replies","type":"text/html","href":"http:\/\/www.blogger.com\/comment.g?blogID=34323687\u0026postID=8476180327752991113","title":"83 Comments"},{"rel":"edit","type":"application/atom+xml","href":"http:\/\/www.blogger.com\/feeds\/34323687\/posts\/default\/8476180327752991113"},{"rel":"self","type":"application/atom+xml","href":"http:\/\/www.blogger.com\/feeds\/34323687\/posts\/default\/8476180327752991113"},{"rel":"alternate","type":"text/html","href":"http:\/\/macro-man.blogspot.com\/2018\/04\/reading-tea-leaves-for-wti.html","title":"Reading The Tea Leaves For WTI"}],"author":[{"name":{"$t":"Macro Clown"},"uri":{"$t":"http:\/\/www.blogger.com\/profile\/17196568155114537578"},"email":{"$t":"noreply@blogger.com"},"gd$image":{"rel":"http://schemas.google.com/g/2005#thumbnail","width":"16","height":"16","src":"https:\/\/img1.blogblog.com\/img\/b16-rounded.gif"}}],"media$thumbnail":{"xmlns$media":"http://search.yahoo.com/mrss/","url":"https:\/\/4.bp.blogspot.com\/-Ve1FCO3J-VQ\/WsU57yOTELI\/AAAAAAAAAns\/NLGIUSwAo785XY1L334nrzgvq4G0GxrsgCLcBGAs\/s72-c\/20180404%2BCNBC%2BOil%2BExcerpt.PNG","height":"72","width":"72"},"thr$total":{"$t":"83"}},{"id":{"$t":"tag:blogger.com,1999:blog-34323687.post-7432415141758263983"},"published":{"$t":"2018-04-03T05:10:00.001+01:00"},"updated":{"$t":"2018-04-14T02:15:59.564+01:00"},"title":{"type":"text","$t":"More Market Pain: The VIX, Swaption Vol, EMFX And Some Investing Philosophy"},"content":{"type":"html","$t":"\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cimg 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\" \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cb id=\"docs-internal-guid-978838da-89b1-a327-7eba-072709d3d242\" style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EThe Market: “Good morning!! How was the long weekend?”\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003ETrader: “Great I guess, party at the in-laws. How ‘bout you?” \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EThe Market: “I spent the last 72 hours furthering my plans to cause you more pain.” \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003ETrader: “Really...Why?” \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EThe Market: “Bwaahhhhhhaaaaa….assume the position!!”\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EWe 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. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EDon’t take my word for it, take a look at the 5yr chat on the VIX. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cimg height=\"312\" src=\"https:\/\/lh6.googleusercontent.com\/nnvJEaRhXWQe5y3aGSy09odCgxlb9EsJBZLTm0eJQ5EPtoVIUBhzYaghQcC50iB5OzfxcYgzvLzT7RhQjM147PW9-kQ-qXhvR91QIgeNFoy0bjlLVsQXiMvFRyJHthV1iMNOO4Gi\" style=\"-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);\" width=\"624\" \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E 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. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EThis 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? \u0026nbsp;Or...is there just nobody on the bid anymore? \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EMy 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. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cimg 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\" \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EQuite 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. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EThere 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. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EWhat about the spicy stuff...high-beta EMFX? Surely the high risk\/high carry currencies have sold off? \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cimg height=\"199\" src=\"https:\/\/lh5.googleusercontent.com\/jBM7c4yAb4xGKcQsqUUzbzQYZpv93cyPDURWxITwXU8zehON7P2jc7cbEKQXBv8ImAbVX1BaDpUW5dv1uHYJUPvorKWqvGI6MsrfCFYjSqvz6fW6-6DN6ra8VW2YaD7AbSyEfOCi\" style=\"border: none; transform: rotate(0rad);\" width=\"640\" \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EMeh….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!\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EFTQ 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. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003EOn a more philosophical note, over the weekend I came across the excellent \u003C\/span\u003E\u003Ca href=\"https:\/\/behaviouralinvestment.com\/\" style=\"text-decoration: none;\"\u003E\u003Cspan style=\"background-color: transparent; color: #1155cc; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;\"\u003E“Behavioural Investment”\u003C\/span\u003E\u003C\/a\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E 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, \u003C\/span\u003E\u003Ca href=\"https:\/\/behaviouralinvestment.com\/2018\/03\/27\/things-that-fund-managers-dont-say-enough\/\" style=\"text-decoration: none;\"\u003E\u003Cspan style=\"background-color: transparent; color: #1155cc; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;\"\u003E“Things That Fund Managers Don’t Say Enough.” \u003C\/span\u003E\u003C\/a\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EHere are a few of my favorites, with my editorial comments in italics: \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E \u0026nbsp;\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cspan style=\"background-color: white; color: #444444; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E“It was a genuine mistake – our analysis was incorrect, but I will make sure I learn from this for future decisions.” \u003C\/span\u003E\u003Cspan style=\"background-color: white; color: #444444; font-family: \u0026quot;arial\u0026quot;; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u0026nbsp;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.” \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cspan style=\"background-color: white; color: #444444; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E“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” \u003C\/span\u003E\u003Cspan style=\"background-color: white; color: #444444; font-family: \u0026quot;arial\u0026quot;; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003EI always appreciated the bloomberg header of a good friend…”Better lucky than good!” There’s a guy that fears nothing. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cspan style=\"background-color: white; color: #444444; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E“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”. \u003C\/span\u003E\u003Cspan style=\"background-color: white; color: #444444; font-family: \u0026quot;arial\u0026quot;; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u0026nbsp;More PMs would be willing to say this if they had a ten year lockup on their investors’ money. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cspan style=\"background-color: white; color: #444444; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E“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”. \u003C\/span\u003E\u003Cspan style=\"background-color: white; color: #444444; font-family: \u0026quot;arial\u0026quot;; font-style: italic; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003EThere 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!! \u0026nbsp;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. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: white; color: #444444; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EThe 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. \u003C\/span\u003E\u003C\/span\u003E\u003Cbr \/\u003E\u003Cspan style=\"background-color: white; color: #444444; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003Cspan style=\"font-size: large;\"\u003EShawn\u003C\/span\u003E\u003Cbr \/\u003E\u003Ca href=\"mailto:TeamMacroMan@gmail.com\"\u003E\u003Cspan style=\"font-size: large;\"\u003ETeamMacroMan2@gmail.com\u003C\/span\u003E\u003C\/a\u003E\u003Cbr \/\u003E\u003Cspan style=\"background-color: white; color: #444444; font-family: \u0026quot;arial\u0026quot;; font-variant-east-asian: normal; font-variant-numeric: normal; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003C\/span\u003E\u003C\/span\u003E\u003Cbr \/\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Ca href=\"https:\/\/twitter.com\/EMinflationista\" target=\"_blank\"\u003E@EMInflationista\u003C\/a\u003E\u003C\/span\u003E\u003Cbr \/\u003E\u003Cbr \/\u003E\u003C\/div\u003E"},"link":[{"rel":"replies","type":"application/atom+xml","href":"http:\/\/macro-man.blogspot.com\/feeds\/7432415141758263983\/comments\/default","title":"Post Comments"},{"rel":"replies","type":"text/html","href":"http:\/\/www.blogger.com\/comment.g?blogID=34323687\u0026postID=7432415141758263983","title":"69 Comments"},{"rel":"edit","type":"application/atom+xml","href":"http:\/\/www.blogger.com\/feeds\/34323687\/posts\/default\/7432415141758263983"},{"rel":"self","type":"application/atom+xml","href":"http:\/\/www.blogger.com\/feeds\/34323687\/posts\/default\/7432415141758263983"},{"rel":"alternate","type":"text/html","href":"http:\/\/macro-man.blogspot.com\/2018\/04\/more-market-pain-vix-swaption-vol-emfx.html","title":"More Market Pain: The VIX, Swaption Vol, EMFX And Some Investing Philosophy"}],"author":[{"name":{"$t":"EM Inflationista"},"uri":{"$t":"http:\/\/www.blogger.com\/profile\/13376753485910252234"},"email":{"$t":"noreply@blogger.com"},"gd$image":{"rel":"http://schemas.google.com/g/2005#thumbnail","width":"32","height":"32","src":"\/\/4.bp.blogspot.com\/-VK2YiYEkB_o\/XI79hGr3rAI\/AAAAAAAADcc\/k0TIRG0Uww8W0ywSOtL6xguQbzOzyOm7gCK4BGAYYCw\/s113\/brazil.jpg"}}],"media$thumbnail":{"xmlns$media":"http://search.yahoo.com/mrss/","url":"https:\/\/lh4.googleusercontent.com\/dKgLbAEd_lWw_077BcKB_LX1ROW_A4pG6S3NiGtKPevtF8gSfIQCRg6iVng1bw0wITEjRBTIoZ3X4dPWOL-hMHG5MfmPG_gl_W-OHQGuVLKNoHck6KvvPbC81lR1po-lR52m_V7f=s72-c","height":"72","width":"72"},"thr$total":{"$t":"69"}},{"id":{"$t":"tag:blogger.com,1999:blog-34323687.post-1629140999054395990"},"published":{"$t":"2018-03-30T16:36:00.000+01:00"},"updated":{"$t":"2018-04-14T02:15:47.075+01:00"},"title":{"type":"text","$t":"AUD and CAD Weighed Down By Higher Funding Rates"},"content":{"type":"html","$t":"\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cbr \/\u003E\u003C\/div\u003E\u003Cimg height=\"430\" src=\"https:\/\/i.imgflip.com\/27fsz4.jpg\" width=\"640\" \/\u003E\u003Cbr \/\u003E\u003Cbr \/\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: large; white-space: pre-wrap;\"\u003EIn a recent conversation I almost broke out into laughter when a trader asked me, \"do you trade value or momentum?\" \u0026nbsp;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. \u003C\/span\u003E\u003Cbr \/\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EAnd 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.\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EOver the course of this year, these two commodity currencies have notably underperformed--not only in the DMFX universe...\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cimg 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\" \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EBut also in comparison to a broader set of commodity currencies (I included EUR as a “control”). \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cimg 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\" \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EWhen you consider the break with high beta carry trade currencies \u0026nbsp;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. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003EA few weeks ago \u003C\/span\u003E\u003Ca href=\"http:\/\/macro-man.blogspot.com\/2018\/03\/cad-and-nafta-risk-show-me-money.html\" style=\"text-decoration: none;\"\u003E\u003Cspan style=\"background-color: transparent; color: #1155cc; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;\"\u003EI picked up on this underperformance in CAD\u003C\/span\u003E\u003C\/a\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E when there had been some noise in the media to suggest it was due to NAFTA risk. \u0026nbsp;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! \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EI 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\u0026amp;P implied volatility, and importantly--the spread of 2yr local rates vs. US swaps. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EIn 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. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cimg height=\"263\" src=\"https:\/\/lh4.googleusercontent.com\/aKRZMtStKVlstyntuIHIOGgLsWZN7UZ844s1cxCxBOcXrJDWgaC4xJGQvc0itDnk1HLijrtvzsaQEDoaVpIgrFyF96zlk99a0meSfZlRnS1NK1B1tJJaZsq8A59GjQBmMUbX1dWQ\" style=\"-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);\" width=\"624\" \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003ESource: JP Morgan data \u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EAnd similarly in CAD...I highlighted the move up from 1.24 to over 1.30 \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-size: large; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cimg 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\" \/\u003E\u003C\/span\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003ESource: JP Morgan data \u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EWhat 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. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cimg 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\" \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EThat 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. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003EAnd thinking more about the fundamentals, \u003C\/span\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 700; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;\"\u003Ethere’s even more to suggest that the widening in LIBOR\/OIS has been a driver for underperformance in AUD and CAD.\u003C\/span\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E 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. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003EOver 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 \u003C\/span\u003E\u003Ca href=\"https:\/\/www.bloomberg.com\/news\/articles\/2018-03-27\/aussie-banks-face-squeeze-as-conduct-probe-crimps-pricing-power\" style=\"text-decoration: none;\"\u003E\u003Cspan style=\"background-color: transparent; color: #1155cc; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;\"\u003Ethey are feeling pinch of higher funding costs\u003C\/span\u003E\u003C\/a\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E and are likely changing their funding strategies in reaction to the changes in the US tax code, something that has been \u003C\/span\u003E\u003Ca href=\"https:\/\/www.wsj.com\/articles\/beat-up-u-s-tax-provision-may-sting-foreign-firms-1518526800\" style=\"text-decoration: none;\"\u003E\u003Cspan style=\"background-color: transparent; color: #1155cc; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;\"\u003Ewhispered in the media for a while\u003C\/span\u003E\u003C\/a\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E, but has taken on new life in the past couple of weeks as a \u003C\/span\u003E\u003Ca href=\"https:\/\/ftalphaville.ft.com\/2018\/03\/23\/1521832181000\/Cross-currency-basis-feels-the-BEAT\/\" style=\"text-decoration: none;\"\u003E\u003Cspan style=\"background-color: transparent; color: #1155cc; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;\"\u003Ethe sell-side analyst community pulled back the curtain on some of these changes. \u003C\/span\u003E\u003C\/a\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E(p.s. Thank you to everyone who sent me the underlying research piece!) \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; vertical-align: baseline; white-space: pre-wrap;\"\u003EWhere 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. \u003C\/span\u003E\u003C\/span\u003E\u003Cbr \/\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; vertical-align: baseline; white-space: pre-wrap;\"\u003EMore importantly, \u003C\/span\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-weight: 700; vertical-align: baseline; white-space: pre-wrap;\"\u003Ein addition to the usual correlations with DXY, commodity prices and overall risk appetite, keep an eye on funding costs and the libor\/ois spread!\u003C\/span\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; vertical-align: baseline; white-space: pre-wrap;\"\u003E 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. \u003C\/span\u003E\u003C\/span\u003E\u003Cbr \/\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003Cspan style=\"font-size: large;\"\u003EShawn\u003C\/span\u003E\u003Cbr \/\u003E\u003Ca href=\"mailto:TeamMacroMan@gmail.com\"\u003E\u003Cspan style=\"font-size: large;\"\u003ETeamMacroMan2@gmail.com\u003C\/span\u003E\u003C\/a\u003E\u003Cbr \/\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003C\/span\u003E\u003C\/span\u003E\u003Cbr \/\u003E\u003Ca href=\"https:\/\/twitter.com\/EMinflationista\" target=\"_blank\"\u003E\u003Cspan style=\"font-size: large;\"\u003E@EMInflationista\u003C\/span\u003E\u003C\/a\u003E\u003Cbr \/\u003E\u003Cbr \/\u003E"},"link":[{"rel":"replies","type":"application/atom+xml","href":"http:\/\/macro-man.blogspot.com\/feeds\/1629140999054395990\/comments\/default","title":"Post Comments"},{"rel":"replies","type":"text/html","href":"http:\/\/www.blogger.com\/comment.g?blogID=34323687\u0026postID=1629140999054395990","title":"38 Comments"},{"rel":"edit","type":"application/atom+xml","href":"http:\/\/www.blogger.com\/feeds\/34323687\/posts\/default\/1629140999054395990"},{"rel":"self","type":"application/atom+xml","href":"http:\/\/www.blogger.com\/feeds\/34323687\/posts\/default\/1629140999054395990"},{"rel":"alternate","type":"text/html","href":"http:\/\/macro-man.blogspot.com\/2018\/03\/aud-and-cad-weighed-down-by-higher.html","title":"AUD and CAD Weighed Down By Higher Funding Rates"}],"author":[{"name":{"$t":"EM Inflationista"},"uri":{"$t":"http:\/\/www.blogger.com\/profile\/13376753485910252234"},"email":{"$t":"noreply@blogger.com"},"gd$image":{"rel":"http://schemas.google.com/g/2005#thumbnail","width":"32","height":"32","src":"\/\/4.bp.blogspot.com\/-VK2YiYEkB_o\/XI79hGr3rAI\/AAAAAAAADcc\/k0TIRG0Uww8W0ywSOtL6xguQbzOzyOm7gCK4BGAYYCw\/s113\/brazil.jpg"}}],"media$thumbnail":{"xmlns$media":"http://search.yahoo.com/mrss/","url":"https:\/\/lh6.googleusercontent.com\/P1ZN10CVfmoigGN7bw9vEmBUYwDyxSmXgNFSL_4KVAV35ape8C5gSHGo98twHyY-ethjVXpRvNO3sxN8ap0wBRs_KwiPb3Ah9etBlPhEY5D6XOWDjBaJLvaOCqRF-IjqiMxm370u=s72-c","height":"72","width":"72"},"thr$total":{"$t":"38"}},{"id":{"$t":"tag:blogger.com,1999:blog-34323687.post-7392980834059626082"},"published":{"$t":"2018-03-27T19:20:00.000+01:00"},"updated":{"$t":"2018-03-27T19:24:04.207+01:00"},"title":{"type":"text","$t":"An exercise in connecting the dots: the Libor-OIS spread"},"content":{"type":"html","$t":"\u003Cbr \/\u003E\u003Cdiv class=\"separator\" style=\"clear: both; text-align: center;\"\u003E\u003Ca href=\"https:\/\/3.bp.blogspot.com\/-RHIuZmm2N5o\/WrqMKkraYnI\/AAAAAAAAAA4\/RQJl3odMTY4dTQtb0qMTxooqXHH-t_o5wCLcBGAs\/s1600\/true-detective-920x584.png\" imageanchor=\"1\" style=\"margin-left: 1em; margin-right: 1em;\"\u003E\u003Cimg border=\"0\" data-original-height=\"584\" data-original-width=\"920\" height=\"253\" src=\"https:\/\/3.bp.blogspot.com\/-RHIuZmm2N5o\/WrqMKkraYnI\/AAAAAAAAAA4\/RQJl3odMTY4dTQtb0qMTxooqXHH-t_o5wCLcBGAs\/s400\/true-detective-920x584.png\" width=\"400\" \/\u003E\u003C\/a\u003E\u003C\/div\u003EThe 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.\u003Cbr \/\u003E\u003Cbr \/\u003EI have been thinking about a few things some very smart investors  shared with me and I am finding connections between the following:\u003Cbr \/\u003E·\u0026nbsp;\u0026nbsp;\u0026nbsp;\u0026nbsp;\u0026nbsp;\u003Cb\u003EA tactical long view on USD and the fact that investors  will, during the next downturn, sell the most liquid asset they own  first\u003C\/b\u003E (although I personally believe a proper USD bounce should happen only after a credit event of some sort).\u003Cbr \/\u003E·\u0026nbsp;\u0026nbsp;\u0026nbsp;\u0026nbsp;\u0026nbsp;The recent\u0026nbsp;\u003Cb\u003ELibor-OIS\u003C\/b\u003E\u0026nbsp;spread widening, which got a lot of attention. I am not convinced by either bearish and bullish views.\u003Cbr \/\u003E\u003Cbr \/\u003E·\u0026nbsp;\u0026nbsp;\u0026nbsp;\u0026nbsp;\u0026nbsp;The\u0026nbsp;\u003Cb\u003Ebullish case\u003C\/b\u003E\u0026nbsp;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\u0026nbsp;increase in T-bill issuance and an increase in CP yields (I  understand the RV argument, but that cannot explain the full move  alone).\u003Cbr \/\u003E·\u0026nbsp;\u0026nbsp;\u0026nbsp;\u0026nbsp;\u0026nbsp;The\u0026nbsp;\u003Cb\u003Ebearish case\u003C\/b\u003E\u0026nbsp;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).\u003Cbr \/\u003E\u003Cbr \/\u003EI think the pressure is mostly coming from \u003Cb\u003Etension\u0026nbsp;in the commercial paper\/short duration credit space\u003C\/b\u003E\u0026nbsp;(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.\u003Cbr \/\u003E\u003Cb\u003E\u003Ci\u003E\u003Cbr \/\u003E\u003C\/i\u003E\u003C\/b\u003E  \u003Cbr \/\u003E\u003Ctable align=\"center\" cellpadding=\"0\" cellspacing=\"0\" class=\"tr-caption-container\" style=\"margin-left: auto; margin-right: auto; text-align: center;\"\u003E\u003Ctbody\u003E\u003Ctr\u003E\u003Ctd style=\"text-align: center;\"\u003E\u003Cimg data-li-src=\"https:\/\/media.licdn.com\/dms\/image\/C5612AQG4stk1EkGKWQ\/article-inline_image-shrink_1500_2232\/0?e=2121375600\u0026amp;v=alpha\u0026amp;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\u0026amp;v=alpha\u0026amp;t=52qD8s0-P5m7q0q3d_QuXu_qjdmJVtfWtcrYsdF50vY\" style=\"margin-left: auto; margin-right: auto;\" width=\"400\" \/\u003E\u003C\/td\u003E\u003C\/tr\u003E\u003Ctr\u003E\u003Ctd class=\"tr-caption\" style=\"text-align: center;\"\u003E\u003Cb\u003E\u003Ci\u003ECP yields rising relative to Fed Funds (%). Source: Citigroup\u003C\/i\u003E\u003C\/b\u003E\u003C\/td\u003E\u003C\/tr\u003E\u003C\/tbody\u003E\u003C\/table\u003E\u003Cdiv class=\"slate-resizable-image-embed slate-image-embed__resize-full-width\"\u003E\u003C\/div\u003E\u003Cbr \/\u003E\u003Cb\u003E\u003Ci\u003E\u003Cbr \/\u003E\u003C\/i\u003E\u003C\/b\u003E  \u003Cbr \/\u003E\u003Ctable align=\"center\" cellpadding=\"0\" cellspacing=\"0\" class=\"tr-caption-container\" style=\"margin-left: auto; margin-right: auto; text-align: center;\"\u003E\u003Ctbody\u003E\u003Ctr\u003E\u003Ctd style=\"text-align: center;\"\u003E\u003Cimg data-li-src=\"https:\/\/media.licdn.com\/dms\/image\/C5612AQHZNgutgjgmZg\/article-inline_image-shrink_1000_1488\/0?e=2121375600\u0026amp;v=alpha\u0026amp;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\u0026amp;v=alpha\u0026amp;t=nhAxAxjsH3KUBMah3Qr4-mwFy18r6ALrCaxHmLXWlJw\" style=\"margin-left: auto; margin-right: auto;\" width=\"400\" \/\u003E\u003C\/td\u003E\u003C\/tr\u003E\u003Ctr\u003E\u003Ctd class=\"tr-caption\" style=\"text-align: center;\"\u003E\u003Cb\u003E\u003Ci\u003E1-5y US HG corporate bond spreads vs CP rates. Source: JP Morgan\u003C\/i\u003E\u003C\/b\u003E\u003C\/td\u003E\u003C\/tr\u003E\u003C\/tbody\u003E\u003C\/table\u003E\u003Cdiv class=\"slate-resizable-image-embed slate-image-embed__resize-full-width\"\u003E\u003C\/div\u003E\u003Cbr \/\u003EA 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 \u003Cb\u003Ea flattening of the credit curve\u003C\/b\u003E, which, during the last leg of the move in the Libor-OIS spread, \u003Cb\u003Edid not happen\u003C\/b\u003E.\u003Cbr \/\u003E\u003Cbr \/\u003E\u003Cb\u003E\u003Ci\u003E\u003Cbr \/\u003E\u003C\/i\u003E\u003C\/b\u003E  \u003Cbr \/\u003E\u003Ctable align=\"center\" cellpadding=\"0\" cellspacing=\"0\" class=\"tr-caption-container\" style=\"margin-left: auto; margin-right: auto; text-align: center;\"\u003E\u003Ctbody\u003E\u003Ctr\u003E\u003Ctd style=\"text-align: center;\"\u003E\u003Cimg data-li-src=\"https:\/\/media.licdn.com\/dms\/image\/C5612AQEqC8ISydDIZQ\/article-inline_image-shrink_1500_2232\/0?e=2121375600\u0026amp;v=alpha\u0026amp;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\u0026amp;v=alpha\u0026amp;t=N5FzeT0my1gabk8moZTfuE29H1-rW4_MMxPdu2QOV7w\" style=\"margin-left: auto; margin-right: auto;\" width=\"400\" \/\u003E\u003C\/td\u003E\u003C\/tr\u003E\u003Ctr\u003E\u003Ctd class=\"tr-caption\" style=\"text-align: center;\"\u003E\u003Cb\u003E\u003Ci\u003EChange in spreads on the JPM JULI Domestic index of US high grade corporate bonds by maturity bucket in bps. Source: JP Morgan\u003C\/i\u003E\u003C\/b\u003E\u003C\/td\u003E\u003C\/tr\u003E\u003C\/tbody\u003E\u003C\/table\u003E\u003Cdiv class=\"slate-resizable-image-embed slate-image-embed__resize-full-width\"\u003E\u003C\/div\u003E\u003Cbr \/\u003EI 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\u0026nbsp;weighing indirectly on banks` excess  reserves.\u003Cbr \/\u003E\u003Cbr \/\u003E\u003Cb\u003EI wonder if we might be closer to a downturn than the market expects,\u003C\/b\u003E with\u0026nbsp;\u003Cb\u003Emarket participants starting to sell liquid assets, but in a slightly different fashion\u003C\/b\u003E,  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\u0026nbsp;\u003Cb\u003Eshortage in Dollar funding, which could theoretically be supportive for USD itself\u003C\/b\u003E\u0026nbsp;(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.\u003Cbr \/\u003E\u003Cb\u003EI 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).\u003C\/b\u003E\u0026nbsp;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.\u003Cbr \/\u003E\u003Cbr \/\u003E(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 (\u003Ca href=\"https:\/\/www.zerohedge.com\/news\/2018-03-20\/why-citi-suddenly-freaking-out-about-exploding-libor-ois)\" rel=\"nofollow noopener\" target=\"_blank\"\u003Ehttps:\/\/www.zerohedge.com\/news\/2018-03-20\/why-citi-suddenly-freaking-out-about-exploding-libor-ois)\u003C\/a\u003E)\u003Cbr \/\u003E\u003Cbr \/\u003E\u003Ci\u003E\u003Cbr \/\u003E\u003C\/i\u003E"},"link":[{"rel":"replies","type":"application/atom+xml","href":"http:\/\/macro-man.blogspot.com\/feeds\/7392980834059626082\/comments\/default","title":"Post Comments"},{"rel":"replies","type":"text/html","href":"http:\/\/www.blogger.com\/comment.g?blogID=34323687\u0026postID=7392980834059626082","title":"44 Comments"},{"rel":"edit","type":"application/atom+xml","href":"http:\/\/www.blogger.com\/feeds\/34323687\/posts\/default\/7392980834059626082"},{"rel":"self","type":"application/atom+xml","href":"http:\/\/www.blogger.com\/feeds\/34323687\/posts\/default\/7392980834059626082"},{"rel":"alternate","type":"text/html","href":"http:\/\/macro-man.blogspot.com\/2018\/03\/an-exercise-in-connecting-dots-libor.html","title":"An exercise in connecting the dots: the Libor-OIS spread"}],"author":[{"name":{"$t":"Jurofalco"},"uri":{"$t":"http:\/\/www.blogger.com\/profile\/09675225771278210268"},"email":{"$t":"noreply@blogger.com"},"gd$image":{"rel":"http://schemas.google.com/g/2005#thumbnail","width":"16","height":"16","src":"https:\/\/img1.blogblog.com\/img\/b16-rounded.gif"}}],"media$thumbnail":{"xmlns$media":"http://search.yahoo.com/mrss/","url":"https:\/\/3.bp.blogspot.com\/-RHIuZmm2N5o\/WrqMKkraYnI\/AAAAAAAAAA4\/RQJl3odMTY4dTQtb0qMTxooqXHH-t_o5wCLcBGAs\/s72-c\/true-detective-920x584.png","height":"72","width":"72"},"thr$total":{"$t":"44"}},{"id":{"$t":"tag:blogger.com,1999:blog-34323687.post-185739422144835316"},"published":{"$t":"2018-03-26T05:15:00.002+01:00"},"updated":{"$t":"2018-04-14T02:15:33.778+01:00"},"title":{"type":"text","$t":"This Is What It Sounds Like...When the Regime Dies"},"content":{"type":"html","$t":"\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EAfter a few go-go years in the stock market, it is easy to forget what a choppy market looks like. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb id=\"docs-internal-guid-438e6217-6084-21b2-0fd3-4ad1f0f00bee\" style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EHere 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. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EIn 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. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EThat 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.\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cimg height=\"380\" src=\"https:\/\/lh4.googleusercontent.com\/NJXE_LieB3LMV2FOuSgTLkUmSnZNCK6kPfKvqvP4R2Holne3MJIhTlvigE8uSblvKnOKLciQhBX7DtJh7z3v90wZmOUhwzSH1lIp9uuAy7m_ImerM2TIynXrFpZi8RVGcnpk4MnM\" style=\"-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);\" width=\"624\" \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EThat is how equities trade in years when the market just kinda stinks for one reason or another. Look back at the chart above. \u0026nbsp;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. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EDoes 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. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EAnd 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. \u0026nbsp;\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cimg 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\" \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EYet...and yet!! I continue to believe we are seeing the beginning of the end of this move wider in spreads. \u0026nbsp;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. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cimg 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\" \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EWhich 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. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cimg height=\"280\" src=\"https:\/\/lh5.googleusercontent.com\/E52GgXrUYq8b8RoKSPev9MsQxEDq773zB9VZ2DeIJdUr5G5PotRjfKg5bBWylLyF0bDOfitluEQxUlvMgwnWBADZZobWNFCsouFUn-erfKmL_pGfWNvBJBFDl0I7DRQmJcmFNb0A\" style=\"-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);\" width=\"624\" \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003EOne 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 (\u003C\/span\u003E\u003Ca href=\"mailto:teammacroman2@gmail.com\" style=\"text-decoration: none;\"\u003E\u003Cspan style=\"background-color: transparent; color: #1155cc; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;\"\u003Eteammacroman2@gmail.com\u003C\/span\u003E\u003C\/a\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E 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. \u0026nbsp;\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EEither 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. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cimg 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\" \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003EAdd this stress--or at least the return of some semblance of sanity--to credit markets at large, combined with some indications that \u003C\/span\u003E\u003Ca href=\"https:\/\/www.bloomberg.com\/news\/articles\/2018-03-20\/soaring-u-s-libor-rate-trickles-into-funding-markets-worldwide\" style=\"text-decoration: none;\"\u003E\u003Cspan style=\"background-color: transparent; color: #1155cc; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;\"\u003Ethe move in libor is hitting markets outside the US\u003C\/span\u003E\u003C\/a\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E, 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. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EI 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.\u003C\/span\u003E\u003C\/span\u003E\u003Cbr \/\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003Cspan style=\"font-size: large;\"\u003EShawn\u003C\/span\u003E\u003Cbr \/\u003E\u003Ca href=\"mailto:TeamMacroMan@gmail.com\"\u003E\u003Cspan style=\"font-size: large;\"\u003ETeamMacroMan2@gmail.com\u003C\/span\u003E\u003C\/a\u003E\u003Cbr \/\u003E\u003Ca href=\"https:\/\/twitter.com\/EMinflationista\" target=\"_blank\"\u003E\u003Cspan style=\"font-size: large;\"\u003E@EMInflationista\u003C\/span\u003E\u003C\/a\u003E\u003C\/div\u003E"},"link":[{"rel":"replies","type":"application/atom+xml","href":"http:\/\/macro-man.blogspot.com\/feeds\/185739422144835316\/comments\/default","title":"Post Comments"},{"rel":"replies","type":"text/html","href":"http:\/\/www.blogger.com\/comment.g?blogID=34323687\u0026postID=185739422144835316","title":"36 Comments"},{"rel":"edit","type":"application/atom+xml","href":"http:\/\/www.blogger.com\/feeds\/34323687\/posts\/default\/185739422144835316"},{"rel":"self","type":"application/atom+xml","href":"http:\/\/www.blogger.com\/feeds\/34323687\/posts\/default\/185739422144835316"},{"rel":"alternate","type":"text/html","href":"http:\/\/macro-man.blogspot.com\/2018\/03\/this-is-what-it-sounds-likewhen-regime.html","title":"This Is What It Sounds Like...When the Regime Dies"}],"author":[{"name":{"$t":"EM Inflationista"},"uri":{"$t":"http:\/\/www.blogger.com\/profile\/13376753485910252234"},"email":{"$t":"noreply@blogger.com"},"gd$image":{"rel":"http://schemas.google.com/g/2005#thumbnail","width":"32","height":"32","src":"\/\/4.bp.blogspot.com\/-VK2YiYEkB_o\/XI79hGr3rAI\/AAAAAAAADcc\/k0TIRG0Uww8W0ywSOtL6xguQbzOzyOm7gCK4BGAYYCw\/s113\/brazil.jpg"}}],"media$thumbnail":{"xmlns$media":"http://search.yahoo.com/mrss/","url":"https:\/\/lh4.googleusercontent.com\/NJXE_LieB3LMV2FOuSgTLkUmSnZNCK6kPfKvqvP4R2Holne3MJIhTlvigE8uSblvKnOKLciQhBX7DtJh7z3v90wZmOUhwzSH1lIp9uuAy7m_ImerM2TIynXrFpZi8RVGcnpk4MnM=s72-c","height":"72","width":"72"},"thr$total":{"$t":"36"}},{"id":{"$t":"tag:blogger.com,1999:blog-34323687.post-5589447761488397353"},"published":{"$t":"2018-03-19T05:10:00.001+00:00"},"updated":{"$t":"2018-04-14T02:15:19.833+01:00"},"title":{"type":"text","$t":"The Anatomy of a LIBOR Panic: New Wides For LIBOR\/OIS"},"content":{"type":"html","$t":"\u003Cdiv class=\"separator\" style=\"clear: both; text-align: left;\"\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EWelcome 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. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb id=\"docs-internal-guid-385ab9ff-3ca3-aa53-129a-f28e29516663\" style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt; text-align: left;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003ESince 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: \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Ciframe 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\"\u003E\u003C\/iframe\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Ci\u003EActual footage of a macro trader reacting to the latest LIBOR fixings\u003C\/i\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Ci\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/i\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cimg height=\"405\" src=\"https:\/\/lh5.googleusercontent.com\/629nfQ98J0H8mAZwcbVPNeRotVw9jJaAbMbf5NvRfjr7RYxSrnF3AdxLpUglY8ZNTvg2xlDZmFHVljfphwFPJfuBAy-gYKSEg6hY5ARHvK5lMmqdVjZQRVpTkrGEYxveNl9f8DHD\" style=\"border: none; transform: rotate(0rad);\" width=\"640\" \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EJPM published this chart showing that the current 3mo libor\/ois spread is at its widest post-crisis level. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cimg height=\"406\" src=\"https:\/\/lh6.googleusercontent.com\/e5Q5zdeZ-Y8KH4oKjWk9LUaj6p7vI0xhS23ecrZuyrfbsBjeVas5_QMqYjRxfiMUi_6Iqig3gYPVN37QjaIJCDn4riCB4KJ31ErshIz9IjKX4BKqhN5sBr-rrwQRgBHGajPpBRWn\" style=\"border: none; transform: rotate(0rad);\" width=\"640\" \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EThat’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. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003ESure, 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. \u003Cb style=\"text-decoration-line: underline;\"\u003EWhat I think the market is missing is that this really is a plain vanilla credit story.\u003C\/b\u003E \u003C\/span\u003E\u003C\/span\u003E\u003Cbr \/\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EWhat makes it different is the magnitude of the move, one driven by the confluence of competing supply and demand factors. \u003C\/span\u003E\u003C\/span\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: large; white-space: pre-wrap;\"\u003EYes, 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. \u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EAnd 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: \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cimg 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\" \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EPut 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.  \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EThe 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...\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cimg 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\" \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E...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. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cimg height=\"288\" src=\"https:\/\/lh5.googleusercontent.com\/Sxc1aW45U7o43lDrlA0i58FYZozJ8o7YcE2Rbf8rUku2YHIt7L8EEFv9LqHEpxjazuwMxAwFvdIeaEfwPd20U9_VYepKryrHObr7lyo2p0hlEsIBLMWNXjN1eFb4yOz4Ch9auOa7\" style=\"-webkit-transform: rotate(0.00rad); border: none; transform: rotate(0.00rad);\" width=\"480\" \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; white-space: pre-wrap;\"\u003EYou can see how these trends impacted the market by looking at this chart:\u003C\/span\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cimg 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\" \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003Cbr \/\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: large; white-space: pre-wrap;\"\u003ELIBOR 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. \u003C\/span\u003E\u003Cbr \/\u003E\u003Cspan style=\"font-family: \u0026quot;arial\u0026quot;; font-size: large; white-space: pre-wrap;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EAt 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. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EThe rest, as they say, is history. \u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EWhere 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. \u0026nbsp;\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cb style=\"font-weight: normal;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/b\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cimg 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\" \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003C\/div\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003Cbr \/\u003E\u003Cdiv dir=\"ltr\" style=\"line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;\"\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003EThis seems like the capitulation move here--L\/OIS over 50….\u003Cb\u003Emoney 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.\u003C\/b\u003E 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. \u003C\/span\u003E\u003C\/span\u003E\u003Cbr \/\u003E\u003Cspan style=\"background-color: transparent; color: black; font-family: \u0026quot;arial\u0026quot;; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;\"\u003E\u003Cspan style=\"font-size: large;\"\u003E\u003Cbr \/\u003E\u003C\/span\u003E\u003C\/span\u003E\u003Cspan style=\"font-size: large;\"\u003EShawn\u003C\/span\u003E\u003Cbr \/\u003E\u003Ca href=\"mailto:TeamMacroMan@gmail.com\"\u003E\u003Cspan style=\"font-size: large;\"\u003ETeamMacroMan2@gmail.com\u003C\/span\u003E\u003C\/a\u003E\u003Cbr \/\u003E\u003Ca href=\"https:\/\/twitter.com\/EMinflationista\" target=\"_blank\"\u003E\u003Cspan style=\"font-size: large;\"\u003E@EMInflationista\u003C\/span\u003E\u003C\/a\u003E\u003C\/div\u003E"},"link":[{"rel":"replies","type":"application/atom+xml","href":"http:\/\/macro-man.blogspot.com\/feeds\/5589447761488397353\/comments\/default","title":"Post Comments"},{"rel":"replies","type":"text/html","href":"http:\/\/www.blogger.com\/comment.g?blogID=34323687\u0026postID=5589447761488397353","title":"99 Comments"},{"rel":"edit","type":"application/atom+xml","href":"http:\/\/www.blogger.com\/feeds\/34323687\/posts\/default\/5589447761488397353"},{"rel":"self","type":"application/atom+xml","href":"http:\/\/www.blogger.com\/feeds\/34323687\/posts\/default\/5589447761488397353"},{"rel":"alternate","type":"text/html","href":"http:\/\/macro-man.blogspot.com\/2018\/03\/the-anatomy-of-libor-panic-new-wides.html","title":"The Anatomy of a LIBOR Panic: New Wides For LIBOR\/OIS"}],"author":[{"name":{"$t":"EM Inflationista"},"uri":{"$t":"http:\/\/www.blogger.com\/profile\/13376753485910252234"},"email":{"$t":"noreply@blogger.com"},"gd$image":{"rel":"http://schemas.google.com/g/2005#thumbnail","width":"32","height":"32","src":"\/\/4.bp.blogspot.com\/-VK2YiYEkB_o\/XI79hGr3rAI\/AAAAAAAADcc\/k0TIRG0Uww8W0ywSOtL6xguQbzOzyOm7gCK4BGAYYCw\/s113\/brazil.jpg"}}],"media$thumbnail":{"xmlns$media":"http://search.yahoo.com/mrss/","url":"https:\/\/img.youtube.com\/vi\/b6xoL76TbnQ\/default.jpg","height":"72","width":"72"},"thr$total":{"$t":"99"}}]}});