If you trade macro and you haven't felt like a kid in a candy store the last couple of days, then you probably aren't doing it right. Recent trading conditions have been like taking a trip in a time machine, back to the era before financial repression, ZIRP, and the intentional emasculation of risk premia by global monetary authorities. It's had just about everything a macro punter could ask for:
* Volatility Not only is stuff moving a lot (which obviously renders it easier to make money), but it's moving in both directions, by and large. This means that even if you find yourself wrong-footed, as many no doubt did at one point or another on Tuesday, you can still trade your way out of it.
* Potential policy shift People define global macro and the way to capture an edge in different ways. From your author's perspective, it's largely about identifying potential policy shifts before they become priced into the market, and positioning to profit as they do so. Given the dearth of policy dynamism in most parts of the world during the era of financial repression, it is small wonder that macro has performed so woefully. As markets noodle on what a Trump administration might mean, the realization that the policy climate may be different for the next four years than it was over the last eight has created opportunities. It has also led to...
* Cascading narratives Trading economic fundamentals and data on any sort of discretionary quick twitch basis has become largely a sucker's game, because there is always an algo that's faster than you that gets in early and takes profit as you trade after a price gap. However, in the case of the potential policy shifts observed above, there are no algo codes to worry about. Instead, the market is chaining together the logical outcomes of what its take on a Trump administration will be, but it doesn't all happen at once. This leads to what Macro Man calls cascading narratives, wherein the market decides that x will happen, and then a bit later realizes that the consequences of x mean that y is also likely and needs to be priced, etc. When this happens, you get things like eurodollar futures butterflies doing relatively little Wednesday and moving sharply higher Thursday. Macro Man bought the EDZ7/Z8/Z9 fly at 1.5, hoping to see 10. We're nearly there already!
On one shoulder your author has a devil perched, whispering "We're back! This is what it used to be like, remember? The narrative and the party are just getting started, so when the market moves you are supposed to give it a kicking and do more. #MMGA!"
On the other shoulder there's an angel murmuring "We haven't had this much fun in years. But we don't actually know what Trump can or will accomplish; McConnell didn't sound too impressed with the infrastructure idea. And last time I checked, Janet Yellen was still in charge of the Fed for another year-plus. Guess what? She's testifying before Congress next week. You think guys that have had it off the last few days aren't gonna lighten up into the weekend, or at least into Yellen. Greed has been a sucker's game for years. Maybe that's changed, but until we know more don;t you think you ought to lighten up a little?"
How to balance these two impulses? Take profits too early, and you potentially leave a lot of money on the table. Take profits too late and you do as well, with the added kicker of a Harry Hindsight "how could you fall for it again?" drain on mental capital.
To a degree, it comes down to knowing yourself and your own foibles as a risk taker. Macro Man has opted to start booking some profits on rates trades, because
a) we really don't know very much at all about what will actually happen
b) this has been a nice run and it's silly not to lock some down
c) it seems very likely that the market will want to flatten some risk ahead of Yellen
d) perhaps most importantly, the volatility and cascading narratives are providing new opportunities even as the old ones mature
While some positions may end up being investments, right now there is too much opportunity (and too much fun) in trades to worry too much about the long term. It may be only slightly longer than five minute macro, but man it really does feel great again.
* Volatility Not only is stuff moving a lot (which obviously renders it easier to make money), but it's moving in both directions, by and large. This means that even if you find yourself wrong-footed, as many no doubt did at one point or another on Tuesday, you can still trade your way out of it.
* Potential policy shift People define global macro and the way to capture an edge in different ways. From your author's perspective, it's largely about identifying potential policy shifts before they become priced into the market, and positioning to profit as they do so. Given the dearth of policy dynamism in most parts of the world during the era of financial repression, it is small wonder that macro has performed so woefully. As markets noodle on what a Trump administration might mean, the realization that the policy climate may be different for the next four years than it was over the last eight has created opportunities. It has also led to...
* Cascading narratives Trading economic fundamentals and data on any sort of discretionary quick twitch basis has become largely a sucker's game, because there is always an algo that's faster than you that gets in early and takes profit as you trade after a price gap. However, in the case of the potential policy shifts observed above, there are no algo codes to worry about. Instead, the market is chaining together the logical outcomes of what its take on a Trump administration will be, but it doesn't all happen at once. This leads to what Macro Man calls cascading narratives, wherein the market decides that x will happen, and then a bit later realizes that the consequences of x mean that y is also likely and needs to be priced, etc. When this happens, you get things like eurodollar futures butterflies doing relatively little Wednesday and moving sharply higher Thursday. Macro Man bought the EDZ7/Z8/Z9 fly at 1.5, hoping to see 10. We're nearly there already!
On one shoulder your author has a devil perched, whispering "We're back! This is what it used to be like, remember? The narrative and the party are just getting started, so when the market moves you are supposed to give it a kicking and do more. #MMGA!"
On the other shoulder there's an angel murmuring "We haven't had this much fun in years. But we don't actually know what Trump can or will accomplish; McConnell didn't sound too impressed with the infrastructure idea. And last time I checked, Janet Yellen was still in charge of the Fed for another year-plus. Guess what? She's testifying before Congress next week. You think guys that have had it off the last few days aren't gonna lighten up into the weekend, or at least into Yellen. Greed has been a sucker's game for years. Maybe that's changed, but until we know more don;t you think you ought to lighten up a little?"
How to balance these two impulses? Take profits too early, and you potentially leave a lot of money on the table. Take profits too late and you do as well, with the added kicker of a Harry Hindsight "how could you fall for it again?" drain on mental capital.
To a degree, it comes down to knowing yourself and your own foibles as a risk taker. Macro Man has opted to start booking some profits on rates trades, because
a) we really don't know very much at all about what will actually happen
b) this has been a nice run and it's silly not to lock some down
c) it seems very likely that the market will want to flatten some risk ahead of Yellen
d) perhaps most importantly, the volatility and cascading narratives are providing new opportunities even as the old ones mature
While some positions may end up being investments, right now there is too much opportunity (and too much fun) in trades to worry too much about the long term. It may be only slightly longer than five minute macro, but man it really does feel great again.
39 comments
Click here for commentsYeah, while the market has not been kind to some of my positions, it has been a ton of fun.
ReplyCopper is over $2.65 now.
Coal companies...
ReplyAgree. Five minute macro profit taking is the way to go.
ReplyWho knows what traders will come up with over the weekend after they come down from their adrenaline high.
Amen MM. Best week I've had in years, and not on a single position but pretty much the whole book.
Reply@bit 1:17 - I think the coal theme is one that is totally misunderstood (not by me of course!). The assumption here is (I believe) that Trump in rolling back clean power plan etc is going to create a resurgence in the domestic thermal coal market for generating power. Where to start. Why not first address the timescales that utility projects work on - decades - well beyond a presidential term. What matters most on those scales is predictability of regulation, costs, and projected cashflow. This type of policy 180 creates ambiguity - not direction. The most likely result is that current projects get put back into re-evaluate stage, but no way they are going to go gung-ho with coal when they would be unlikely to break ground by the end of T's (the other T's) first term.
Second, a lot of the policy and regulation is not being driven by Washington at all. California, a voracious consumer of electricity, has its own mandates to be off coal in a quick timeline. Other states are on CA's tails.
Third - we are in the midst of a big changing of the guard at utilities. The coal dinosaurs are almost all gone, replaced by a generation that sees a different future for utilities. Thats not entirely driven by age, but also by the realities faced by utilities of declining to flat demand.
Lastly, even not including externalities (like CO2 emissions, health issues etc) coal is simply not the cheapest fuel source anymore. Natural gas - particularly if T continues his plan for pipelines everywhere - is way cheaper, uses less water. Wind with its very low (~0) feedstock costs benefits handsomely from low finance rates.
So yeah, lots of cascading themes, not all of them right. I will be really surprised if the coal renaissance theme lasts much longer.
@MrT, yeah, it is very hard to look at nat gas under $4 out ten years and think, 'coal!'
Reply...and none of the field collocated generators are paying anything close to Henry hub.
ReplyAgree with Mr T. Trump will benefit natgas and US midstream that pipes natgas much more than coal.
ReplyWill clean energy tax credits be reduced? Likely, but again winner will be natgas.
I also agree with MM, massive infrastructure project far from done (I view it as unlikely) and not sure how much interest rates back up.
There are lots of good fades out there this week. It's getting to be Silly Season in a few sectors. Next week is options expiration, and we should see all of the mis-positioning corrected by then, and cooler heads may begin to prevail.
ReplyLong coal miners is one obvious good fade, and pretty soon shorting the long bond will be too. That trade is not called the Widowmaker for nothing. Trump didn't conquer global deflation overnight, and Dame Janet doesn't have more than one 25 bps rate hike up her kilt. What the market action has done is to do the Fed's work for it, and now she can hike 25 bps without moving the market at all, which is after all, the Fed's modus operandi of choice.
Even the battered MXN is probably going to be a screaming buy soon. Munis and preferreds are getting there already, but with the bond markets closed for Veterans Day, we should probably allow for one more day of headless chickens on Monday before a really good mean reversion trade sets up. With the Santa rally having apparently arrived early, this might not be a bad time to get ready to receive rates for a while, perhaps.
If LB were a global fixed income fund manager based in Europe he would be falling over to load the boat with Treasurys and unload BTPs and other "certificates of confiscation" as fast as he could, and this will drive a surprisingly strong rebound in USTs. [We imagine this view will be unpopular].
Anyway for the time being, we'll sit back and watch punters bid up coal miners and copper and listen to the clueless "liberal" US media issue mea culpas about how they misread the mood of America while sipping their grande soy lattes within their self-reinforcing echo chamber. Universities are apparently holding counseling sessions that resemble wakes, in order to do some much needed handy-holding and tear-wiping for those in academe who feel bruised by their recent encounter with real world Democracy. Enjoy the show.....
Paging Mr.Corzine. Mr.Corzine please contact Mr.BTP and Mr.OAT.
ReplyTrump is already done in terms of market reset and the first take on Trump about and global trade volatility will probably end up being the right one. So now what price Italy screws Renzi in December?. Do we like £v Euro?. Spotlight heading back to Europe.
Reply"Do we like £v Euro?. Spotlight heading back to Europe."
ReplyI think that is a decent bet Checkmate. Mind you, the vertical ride of EURGBP was always going to correct anyway, so I am not sure what comes first here. The inevitable mean-reversion of the political "catalyst" ? Another thing here is the ECB, who likely will be locked in at low rates even as the Fed has to go because of the rather tasty break higher in U.S. long bonds. Now, I agree with LB here that a cool head is a good advice ... the inflation/bond bonfire will not be a straight shoot higher, but a wider rate differential between the U.S. and the EZ/JPN is a fair assumption now I think, and the EURUSD will take the cue.
Also, if global free trade is now under threat, and if Brexit goes pear shaped Germany will soon see some very different export data in its main export markets. I won't happen overnight, but the market may discount it quickly.
Meanwhile, on equities ... I think the direction is lower into Q1. I am going to beat Polemic to it, but end of February is looking good for a punt ;) ... 17th of Feb is it Pol?
I concede, though, that the sector story will get whipsawed significantly as the Donald's policy machinations roll in on the screen. The rally in U.S. banks has been quite something this week.
Overall, Europe has a lot on its plate now faced with a U.S. and U.K. who basically don't get what it is they're doing or actively want to subvert it. My guess is that the EU comes together because when they're staring into the abyss that's the only way forward. But risks are very high here. I will not go into a long rant here, but simply say this: if the world is now better off without the "experts" who didn't see "it" coming and who believes that the maintenance of mutual interdependence via supranational institutions, NATO, UN, EU etc etc then so be it. I am one of said experts, and I can assure you that we will happily crawl back into our hole and keep quiet. Let the "other guys" run things for a while. It will be YUGE! ;).
DX still strong, pushing on from 99 towards 100 before it takes a breather? Bonds still trading heavy in the futures market, which is predicting additional weakness next week, and the hammering for MXN and the EWW Mexican ETF may still not be done (memories are still fresh and painful of knife-catching attempts in RUBUSD a while back).
ReplyTo LB, this is the only thing we are looking at: FX and govies, these are the big markets that make everything tick, and are the things that really matter right now. [Not that trading the other stuff isn't fun!]. We expect to begin some nibbling on Monday, and continue through the rest of the week, perhaps even late in the year for the most hated of asset classes.
Btw, rather than obsess about what Trump said that he was going to do in office, let's do a thought experiment instead and as world-weary and cynical investors, let's imagine that we have a sluggish global economy and a sputtering US recovery, with an economy creating maybe +150k jobs/month, that China is still slowing down and exporting deflation, that Janet Yellen continues to wage war on us all via financial repression, and finally, that America has just elected those visionary leaders President Mitch McConnell and his running mate Paul Ryan. Here is Nouriel Roubini to take up the theme:
http://www.marketwatch.com/story/trump-will-govern-as-a-mainstream-republican-not-as-a-radical-populist-2016-11-11?mod=MW_video_top_stories
Against this background, fixed income (munis) and dividends (preferreds, REITs) already seem far more attractive than equities. It is likely that the patience we have shown all year will begin to be rewarded over the winter. The Donald and Miss Market may have a short honeymoon, especially after Janet has done her thing in December. You can make a strong case (using iterative logic) for one rate hike per year under Dame Janet, whatever the dots may foretell.
LB is interested to listen to some of the big bond guys over the next few weeks (Gundlach predicted a Trump victory, btw) about where things are going. We wouldn't be surprised if some of those guys were already tip-toeing into the Treasury market, if not yet filling their boots. Anyway, as Polemic always said, for the time being, Price is News in fixed income. Equities will remain in Silly Season a while longer, we suspect.
I noticed that the Dow Jones was up +1200 on Trump's bearish election victory, followed by another +300 gain the day after. This vertical rise in US equities is extremely bearish, and I expect a similarly bearish outcome such as Dow 20k and SP500 3k by Xmas.
ReplyAgreed with LB.
ReplyNow I am thinking about how Trump can keep his promises. I know politician rarely do, but when they have all the powers, they really need to achieve something.
First, there would be some tax reform (tax cut) which is already very likely even before the election. Now given that the deficit is sky high and current debt load, and Trump is anti-national debt in the campaign. So the only option for Trump to achieve 1) tax cut 2) infrastructure spending and 3) no debt spike is to allow the huge foreign profits of multinationals to come back to the US. I assume that those profits mostly stay in EU tax havens right now.
So this possibility suggests two potential trends: increasing buy-back and dividends for multinationals and capital flow from EU to the US. Markets are pricing these two trends: higher Dow and lower EURUSD. I think that the latter trend might still have a long way to go.
Howdy - long time away for me.
ReplyThanks to MM as always for his thoughtful and timely posts. The comments section is still fantastic.
I held onto my REITs far too long and am not selling now. I've started accumulating shorts across EM, R2K and the S&P.
One really important thing to consider, the blue half of the country is experiencing various stages of depression. I've personally seen people crying and seeking comfort in person, online, etc. This group of people has driven the economy in the past 8 years. IMHO. their depression over Trump's election will directly reduce their enthusiasm and confidence over spending Whether it is discretionary travel, electronics or buying a house - it will all drop. Their 8 party, instead of going another 8 years has been shut down.
I think the market under-appreciates the blues of the Blues.
Nice eurodollar butterfly trade, MM.
ReplyThoughts ... Trump means Congress will approve fiscal spending before and not after any recession, so that eliminates some recession risk which admittedly was seen high anyway. Trump also means lower taxes with some demand effects. Infrastructure spending will likely be way lower than Trump's campaign promise and probably won't materialize until later next year. It does put money into the hands of people who will spend it (construction workers, for instance) and create inflation (unlike trickle down monetary stimulus). Enforcement of immigration laws maybe puts some upward pressure on wage inflation too. Expect deregulation, which should boost business sentiment and drilling activity. Assuming no big mistakes on trade, I'd think we get inflation and some pickup in real growth, and that seems to square with the roughly 1/3 real rates and 2/3 implied inflation breakdown of the backup in yields since the election. It was interesting listening to Druckenmiller the other day. Very bearish global rates, but what surprised me most was his belief in the Laffer Curve, and his pointing out that it worked in the 80s and the reason we had deficits was defense. A very cursory glance at the #s suggests this interpretation may not be as ludicrous as I'd have assumed. Still, I'm skeptical deregulation and low taxes can offset the secular headwinds of demographics and indebtedness, and the fiscal spending impulse will fade after a couple years leaving bare our low growth situation. All to say, I think the move in rates is justified, but I'm not inclined to chase.
Trump's authority to back out of trade deals varies from deal to deal, but NAFTA's terms are very weak and allow him to do whatever the heck he wants. So I have no temptation to fade MXN's move. My guess is it has further to go. MXN is in trouble for so many reasons. Not sure what to do in EM generally. There are the high yielders that are selling off because of the bond sell-off. Maybe that's a fade soon. And then there are the generally low-yielding FX intervenors who have been put on Treasury's watch list. Like KRW and TWD. The market is selling these, but if Trump pressures them to cutback intervention, doesn't that argue for stronger currencies given their persistent current account surpluses? Someone please set me straight on this. And then there's China. I thought they'd let the currency resume devaluation against the CFETS basket after a Hillary win, but CNY's floor against the basket has held steady (maybe that's because of increased sensitivity due to Trump or maybe the real event driving intervention decisions are these leadership appointments in '17). The crazy thing about Trump's claims against China are that the PBOC is actually holding up the currency ... so maybe Trump will just negotiate for lower Chinese tariffs on US goods/services?
As for my own book, I'm still bullish USD (echoes of the USD under Reagan, and the place to be if China slows). Shorted gold. The SNB seems to have abandoned the soft floor in EURCHF at 1.08 and I'm short that (if there's someone to clobber with tariffs it's them, I'll add). And if bond and commodity markets are at all right, world inflation is getting a boost. What currency benefits from just a bit more inflation? SEK. And might the Riksbank think twice about FX intervention now? Sure. So EURSEK seems a decent short too.
Let it be recorded for posterity that at this pivotal time in history we lost Leonard Cohen and gained a Trump. The who shock was clearly overwhelming. As a summary of the times we live in I am happy to be closer to the checkout than the entrance.
Reply"As a summary of the times we live in I am happy to be closer to the checkout than the entrance."
ReplyNow now Checkmate, stick around please ;).
"Trump's authority to back out of trade deals varies from deal to deal, but NAFTA's terms are very weak and allow him to do whatever the heck he wants. So I have no temptation to fade MXN's move. My guess is it has further to go. MXN is in trouble for so many reasons."
I agree with this Jonho. If Trump is looking for an easy victory to serve to the hounds this is an easy one. Still, we need to gauge exactly what kind of cabinet he gets, and how the house and senate ends up on these issues. A lot of assumptions at the moment! But Mexico is definitely in a spot of bother here.
russell 2k futures up a solid 14.5% from the post-election lows - in 3 days! That, boys and girls, is freaking insane.
ReplyI've been away from the screen, family stuff, so just saw some charts. Wow. Like mr t says, some big moves.
ReplyJust a quick thought on equities. I very much doubt ppl are going to crowd into Bac or all the other pro growth trades. Financials suck. They are not in a good secular trend. Ok they can re rate but for how long. You crowd into and chase trending secular companies,Like a lot of the tech names. Too me this last moves looks very much like a late stage move, though the sectors are rate sensitive, which typically is an early move in a cycle. So nothing is 100%. But I doubt rates can go much higher without really hurting equities, unless there is real strong growth coming. Still not seeing that, especially for corporations. ..but maybe I'm wrong. Would think transports would be up much more if growth was coming.
and don't get me started on em fx...
Wasn't it at the start of the year whenever only talked about the horrible state of Brazil. Although Mexico doesn't have a rouge president to impeach still feels kinda familiar. Getting cheap on ppp
ReplyStocks are clearly in the start of a massive bull market. People here saying they are over-priced are obviously wrong, just as the "experts" were wrong on all of the election calls. I expect US equity markets to double in the next year or so.
ReplyAre you Harry Dent?
Reply"That, boys and girls, is freaking insane."
ReplyIndeed, bonkers. All macro data suggests we're very late cycle here. I think Anon @ 9.02 AM will be disappointed. If you look at U.S. equities and blow out the chart, momentum has been stalling for a while. I am not in the 666 camp ... that's silly.
But, things are getting shaky. My reason is simple. I always thought that a more sustained sell-off would be driven by higher yields. There is no way that this, inherently overlevered, market can survive this "vector" in rates for long.
The "Trump reflation" story obviously challenges this view, and I am open to the idea that it takes over. We always have to be open to the idea that we get things wrong :). But my firm recommendation here is not to chase. If you have a shopping list; it will get cheaper. The funniest thing here is that last week's have thrown the Zero Hedgers out on their arse ... they got their anti-establishment candidate, and the market is going up. What is their play now?
Finally, I really struggle with the idea investors look at all this massive political uncertainty, i.e. the questioning of fundamental institutions such as NATO, free trade, the EU and the EZ, and conclude that risk assets are a buy. Where do you hide from all this now? Maybe that is the silver lining here. I am increasingly coming to the conclusion that Mr. Market is about to show these wardens of the "new political" winds a little bit of humility. They can do whatever they want, but don't expect financial markets just to play along with it.
The timing of this, though, is really difficult. I fully concede that if you look beyond the massive volatility last week ... sector rotation, stock picking continues to quietly rise as the key strategy. Risk parity is out, active management is in again. Maybe that change is more fundamental as MM has been musing about recently. We will see.
As I head back to the UK from the USA. My first trip here in nigh on 40years I would say go long healthcare. Without wishing to give offence,which means I am going to, this country is the outright winner in the obesity stakes. Real eye opener despite having read about the issue. Demographic timebomb of weight related disease. Nowhere else in my global travels have I encountered anything remotely approaching this level of health issue.
ReplyCv, i echo your comments. You do have to be open minded, which i am given the scale of the moves, but to me this just smells of big time rotation in equity sector trades. For us to really rally what is going to be the leadership in equities. In 2013 we had a big pe expansion but stocks were much cheape than they are currently and almost everything was working, especially value. That seems to be the play book market is using now. But im very cautious of a reversal in fiancials. Meanwhile the seculsr growth names are getting dumped along with staples. Remeber those were the only thing holding the market up last year. When all of the former leaders start selling off, you should pay attention.
ReplyAnyways lets see. Im loaded full of financials in my long term accounts so not really complaining.
Financials are trading on the steeper yield curve (perhaps temporary) and hopes of deregulation (by no means a sure thing). We think that the XLF will be an excellent fade soon, perhaps within a week or two.
ReplyJim Bianco echoes some of the thoughts expressed here by LB and others regarding the "Trump Reflation Trade" and the huge moves we have seen in rates:
http://www.fuw.ch/article/the-markets-are-trading-schizophrenically/
LB has a shopping list ready in income-producing vehicles, and may start buying as early as Monday. We do agree with abee that when the markets lose interest in the leading stocks one should be cautious. As CV points out, it is getting very late indeed.
After last week’s rapid run-up, Jeffrey Gundlach won’t rule out “a tradable rally in the bond market before year end. But the longer-term trend likely is higher. The idea that inflation and interest rates can never go up is a very tired narrative, born of years of stability in both."
ReplyTrump’s pro-business agenda is inherently “unfriendly” to bonds, Gundlach says, as it could to lead to stronger economic growth and renewed inflation. Gundlach expects President-elect Trump to “amp up the deficit” to pay for infrastructure projects and other programs. That could produce an inflation rate of 3% and nominal growth of 4% to 6% in gross domestic product. “If nominal GDP pushes toward 4%, 5%, or even 6%, there is no way you are going to get bond yields to stay below 2%,” he says.
The above was from: "Gundlach: Bond Yields Could Hit 6% in Five Years" in this weekend's Barron's
ReplyMore from Gundlach: While the bond bull market ended in 2012, he turned “maximum negative” on bonds on July 6, two days before the 10-year Treasury yield hit a multidecade closing low of 1.366%. He predicted shortly thereafter that the 10-year yield would top 2% by year end. He has been selling bonds and buying TIPS, which he calls “my favorite investment as of two months ago.”
ReplyA survey of 114 global fund managers on Wednesday by Bank of America Merrill Lynch Global Research found that most of these professional investors thought Mr. Trump would probably soon reach an agreement to repatriate some of the American corporate money stashed overseas and increase spending on those infrastructure projects. Most said they didn’t expect to reduce risk in their portfolios by raising cash. The single most attractive option for the group was to invest in the S.&P. 500.
Replyhttp://www.nytimes.com/2016/11/13/your-money/the-trump-stock-rally-calamity-averted-with-a-little-charm.html
Back after a 3 week trip to India visiting family and friends - some observations:
Reply1. The property market in India is headed for quite the comeuppance in the short run with the high denomination crackdown,- while the sudden realization that one's recently withdrawn cash has no value can be a little unsettling for short term visitors, one has to agree with the step from a long term perspective. That said, the number of multi-million commercial and retail transactions where a lorry drives up with the buyers untaxed money in Rs 1000 notes is quite material. Given how critical the property market is to consumer sentiment and spending in India, not to mention the shadow taxation increase this represents, I doubt India sees 4% plus growth for the next couple years, which is borderline recessionary. I do think India govvies are a buy across the board because this is bullish the rupee and quite deflationary.
2. Now that that's out of the way, the debate in the US over whether Trump will re-ignite old fashioned supply side and infrastructure based growth is frankly silly - by all means trade away and giddily buy construction stocks if you are so inclined, but the fact is, nothing from the old economy can stimulate growth in the US - that train from the 1950's is so far away from the station its not even a blip - in this paper shuffling economy, the asset valuation impact from a 150 bps interest rate increase far, far outweigh the puny 1.6 multiplier (as someone had suggested) on $300 Bn spent repairing bridges in Minnesota and the like.
3. It's very simple here - if bonds don't pick themselves up soon, I highly doubt that a 6 year stock market rally which has primarily been about low rates forever suddenly gets to pick a new 'inflationary growth' narrative without some pretty big pipers to pay first. The moves we are seeing in the market last few days are big, and for us volatility fiends, welcome, but something tells me they are way more about short term positioning than a cool calculated reaction to changed fundamentals - I plan to sit on my hands for a couple weeks, let options expiration carry a few more punters out, and then lay in to risky asset shorts. Unlike the chicken feed swings we have been seeing since 2014, I finally feel like the bond markets have set some dominoes in motion that equities, in their usual drugged up mind expanding mode don't quite realize yet.
Oh, and also, its great to be back - the next time you complain about things on the ground stateside, just remember schools just had to be closed in India's capital for 3 days because the air outside was literally unbreathable. Not exactly a one off either.
washed: Thank you for highlighting the implications of the high denomination crackdown in India. I missed that.
ReplyCV: Re higher yields driving a sell-off in equities, I see a paradox. The selloff in bonds could first drive money into the stock market and prices higher. After that re-positioning is done, however, I can see your scenario playing out, especially as buyback support fades due to higher rates. Let's also remember Trump is talking about a massive repatriation scheme which could drive some more buyback activity (interestingly, I've read that most of the overseas cash companies have is in dollars, so the flow back to the US wouldn't be as supportive of USD as some may think). And finally, yes, I thought it was pretty hilarious that zerohedge readers' favored candidate sparked a further stock market rally and demolished their pet rock (gold).
What if US went 15% corp tax with a once of lower rate with a conditionality attached that repatriation was invested in an infrastructure bond?
ReplyThe problem with the bearish sentiment on US equities seen here (and I echo) is that the damned US stock market is in a secular bull market most likely. So timing is very hard. If the narrative is repatriation and stimulus which the broad index moves and at the stock level seem to be suggesting then you likely need a trigger (sharp reversal?) to nullify that narrative or enough time to pass before its priced in and you can fade....in the meantime US equities can grind higher (not sure how much though) and suck the life out of a short trade. The Bond market needs to push the envelop here, IMO, and while I can agree with Gundlach longer term, shorter term I like LB thoughts, as ppl probably step in here soon, just bc there is still so much cash and you dont really have ppl scared of higher rates, IMO. They are still living in never land, and if shit hits the fan its a good hedge.
ReplySo conclusion, watching and waiting..
What I do think could get the market jittery is if the same damn thing with Brexit and Trump happens in Italy, though frankly I'm not close to the situation, so just assuming its still likely the opposition party is running on a platform of anti EU. But if thats the case, then maybe someone wakes up and realizes the emperor has no clothes.
Oh and still very bullish bitcoin
@abee - no major disagreements, but will make two observations:
Reply1. The "people" you refer to, have lost a lot of money in bonds, gold, and STUB portfolios in the last 2-3 months, but we are only now getting to the point where the majority of the punters in those are barely breakeven YTD - so the fun, as it were, is just beginning.
2. I am really not sure there needs to be a catalyst for anything, these markets are increasingly all about positioning - the bond selloff was already halfway deep from the highs with clinton a lock, so clearly positioning trumps everything else, and boy were there signs that it was crowded. I think we need to see clear signs that the pendulum has swung hard the other way with everyone screaming 'inflation' - id give it a few more weeks for stepping in - frankly in the larger scheme of things, a correction in equities may come to be seen as a small price to pay for keeping a bid under bonds.
I think we're going to return to "normalcy" and bonds and stocks are going to start trading more or less as they should without interventions.
ReplyMacroeconomic situation is improving and I think we could very likely be at the beginning of a more robust growth cycle, accompanied by higher inflation and rates.
"Re higher yields driving a sell-off in equities, I see a paradox. The selloff in bonds could first drive money into the stock market and prices higher. After that re-positioning is done, however, I can see your scenario playing out, especially as buyback support fades due to higher rates. Let's also remember Trump is talking about a massive repatriation scheme which could drive some more buyback activity (interestingly, I've read that most of the overseas cash companies have is in dollars, so the flow back to the US wouldn't be as supportive of USD as some may think)."
ReplyHmm, fair enough Johno. The reason I worry about higher rates, in general, is that non-financials have levered up hugely in this cycle. A lot of these "quality" names will get really hammered as borrowing costs rise. Also, I fear that it could spark a liquidity crisis in corporate bonds, as also discussed here. The repatriation of cash would be a one-off, and I have to say that the marginal return on "putting it to work" now, so late in the cycle, with a cyclically very tight supply curve ... I don't really see much other than higher yields, inflation and the traditional "late-cycle" expensive M&A.
the baltic dry index shot up after trump go in! WOW, see here==> http://www.bit.ly/2f7gaUw
ReplyThat means sector rotation could be a good opporunity for HUGE profits.