While the details on the Trump administration are slowly falling into place (and by extension, a slightly clearer picture of what the policy program will look like), at this juncture we remain firmly in the realm of conjecture as to what the actual policy program will look like.
Trump wants to repeal Obamacare; the Republican Congress agrees. Trump wants to deport illegal immigrants; some key GOP lawmakers are somewhat less than enthused. Trump wants to build out infrastructure; the Democrats love this but the Tea Party hates it. Trump wants to cut taxes; the Tea Party loves this but the democrats hate it. Trump wants to impose term limits; Congressmen of all stripes laugh in his face.
The further markets go towards pricing something as a done deal therefore, the greater the asymmetry of taking the other side. Frankly, price action in some of the base metals has become a joke. A trader, an analyst, and a Chinese noodle stall owner walk into a rebar....What we can say for sure, however, is that Friday's price action in copper sure looked climactic, and there's now a lot of fresh air to the downside.
Macro Man put out a small short on Friday, because that's the sort of trade you can do when there are so many opportunities opening up.
Speaking of opportunities, your author has also used the ongoing weakness in front end rates to lighten up further, and he's now out of most of his positions. The EDZ6/Z8 spread, for example, has risen 40 bps since the election. While pricing rate hikes of just 72 bps over a 2 year span still seems very low, it's worth recalling the asymmetric reaction function of fixed income to negative economic and financial market developments. Perhaps those will be left in the dust in the brave new world of President Trump, but the proof of the pudding will be in the eating. In the meantime, a 50% retrace of the downtrend of the past two years seems as good a place as any to go nearly flat.
Lest we forget, Janet Yellen is still in charge of the FOMC for the next year and a quarter or so. She has recently expressed a desire to run a high-pressure economy, which means allowing thing to overheat a bit before reacting very strongly with monetary policy. Whether this is what she should do is a different question for a different time. All we know is that whenever she expresses a view, it almost always sounds dovish.
Given that she's testifying before Congress on Thursday, if you're short rates and you don't lighten up a bit, the joke could be on you.
Trump wants to repeal Obamacare; the Republican Congress agrees. Trump wants to deport illegal immigrants; some key GOP lawmakers are somewhat less than enthused. Trump wants to build out infrastructure; the Democrats love this but the Tea Party hates it. Trump wants to cut taxes; the Tea Party loves this but the democrats hate it. Trump wants to impose term limits; Congressmen of all stripes laugh in his face.
The further markets go towards pricing something as a done deal therefore, the greater the asymmetry of taking the other side. Frankly, price action in some of the base metals has become a joke. A trader, an analyst, and a Chinese noodle stall owner walk into a rebar....What we can say for sure, however, is that Friday's price action in copper sure looked climactic, and there's now a lot of fresh air to the downside.
Speaking of opportunities, your author has also used the ongoing weakness in front end rates to lighten up further, and he's now out of most of his positions. The EDZ6/Z8 spread, for example, has risen 40 bps since the election. While pricing rate hikes of just 72 bps over a 2 year span still seems very low, it's worth recalling the asymmetric reaction function of fixed income to negative economic and financial market developments. Perhaps those will be left in the dust in the brave new world of President Trump, but the proof of the pudding will be in the eating. In the meantime, a 50% retrace of the downtrend of the past two years seems as good a place as any to go nearly flat.
Given that she's testifying before Congress on Thursday, if you're short rates and you don't lighten up a bit, the joke could be on you.
26 comments
Click here for commentsThe metals have bought as we Brits say about railways not running 'the wrong kind of leafs on the rail'. There are various process inputs of which basic materials is but one. More notably the other is labour. If the hypothesis is that globalisation was deflationary and labour costs were a major part of that process(how can we argue otherwise) then anti globalisation promises to be the reverse. I've been on this as a long term macro theme ,but I thought it would be 2019/20 and onwards before it really caught fire. Rising labour costs are a long term prerequisite for a bullish risk market based upon easing the debt servicing load ,but first it's got to go through the destructive part of the misallocation that as occurred via the low rate policy of recent years. Seesaw market for bonds and equities based on labour inflation and the rising costs of finance.
ReplyHola Washed, good to hear you are back. I have been occupied also, but in my case, moving furniture and house. Finally succumbed to buying more into the Australian housing bubble. As Abee wisely told me, one has to leave one's theories of housing bubbles at the door. A housing upgrade was overdue to keep the Mrs happy.
ReplyI am really tempted to don the kevlar and buy US bonds and sell SP500 here. Could be a bit early but I think a starter position could be justified.
Unimaginable as it seems currently, I also wonder if a USD correction is in the offing soon, although I wouldn't punt on it at this point, I would be wary of being long dollars, even though a fed hike seems to be a dead set cert.
Metals and cyclical in general are v bullish. Expectation of inflation has changed a lot! Admitted, nothing concrete has done yet - Trump's plan has to be implemented. But expectation itself could change inflation trajectory.
ReplyBuckle on! We are riding on this massive change of inflation perception.
From DZ
ReplyFrom my perspective it's simply too early to assess the magnitudes of each of these policy changes. I am therefore quite happy, and extremely lucky, to be flat! I do not want to buy spoos at the all-time highs. I do not want to buy the dip in blues. And I'm quite nervous that last week's USD rally has much further to run. So I'm certainly not ready to sell the USD vs BRL, ARS, and COP again. The market has been shorting dollars since the "detente" story in February. And that was the right thing to do into the election. But there is no G20 accord in the post-Trump world.
Now, it's a time for some reflection. And honestly, there are only two types of trades which look marginally interesting to me here. First, European break-up trades such as long Bunds/short OATs. And second, long USDJPY. The Italian referendum and the French election offer enormous risk for the European project, especially after a Trump win. And with both US and Bund yields backing up, JGBs will soon be pressing up against the zero cap. The BoJ will be forced to buy much more than ¥80tr/mth. I think you can tiptoe into those two trades, but there is no reason to have hero-style positions into what is bound to be a very volatile and confusing post-Trump market. Good luck trading
re Washed,
ReplyI agree with you that the market is all about positioning nowadays. My only point regarding the equity bearishness is that when I look at the equity charts, this is not a market that is screaming to sell, not until I see a clear reversal. 90% down days followed by 90% up days (like last week) is usually a good recipe for higher prices. Not a big IDB fan, but that nugget of market intelligence has worked pretty well over the years
Sorry for over posting but I found this funny.... I mean Watsa has only been short Russell since 2009 ;-)
ReplyFairfax Financial Holdings Limited (TSX:FFH)(TSX:FFH.U) announces that after considering the effect of the recent U.S. elections and the potential for changes that may dramatically impact the U.S. economy and, therefore, the U.S. equity markets, the company determined it was prudent to significantly reduce its hedge of its equity investment exposure immediately. As a result of this action, equity hedges currently represent approximately 50% of the company's equity and equity-related holdings (a reduction from 112.7% at September 30, 2016). Fairfax will continue to evaluate the post-election U.S. economic indicators and may determine to reduce those equity hedges further.
"We hedged our equity investments to protect our shareholders' capital from exposure to the impact of deteriorating economic fundamentals," said Prem Watsa, Chairman and CEO of Fairfax. "We constantly monitor these hedge positions relative to economic fundamentals. We believe the U.S. election may result in fundamental changes that may bolster economic growth and business development. As a result, there is the potential for a longer term rally in U.S equity markets that reduces the need for the capital preservation protection of equity hedging."
@abee the reason the spoo chart doesn't say screaming sell in the last few days is because the internal dispersion is epic, probably the highest ever, so spoos overall haven't really gone anywhere - I mean when do you see consumer staples down 10% and consumer discretionary up 10%? As I said, I expect this calm on the surface, bloodbath below regime to persist for a few weeks (just in time for Nico to come back from Hawaii!!!).
ReplyA bond rally that looks more than a re-tracement would change my mind, but I am really, really not expecting that.
Patience.
Well, LB was certainly right that Monday would be another silly-season day. Turnaround Tuesday tomorrow? Bucky has legs here; my my.
ReplyI have been thinking about the EZ break-up trades here too Abee. I don't believe it will happen, but OATs would be taken to the shredder if Le Pen snatches the election. I mean, proper hairy and scary!! I am not sure how OTM puts are priced etc, but that would be ok.
Again, my playbook was to play it really safe in Q4 anyway. And I haven't seen anything so far to change that ... on the contrary!
Hi! long time lurker, first time poster. Thanks for the wonderfull community you have here MM. Really appreciate it
ReplyWanting to retire someplace in the EU, seems the best idea of the year was to have the portfolio +USD. Still, I begin to wonder how long this USD strength can continue. As MM showed the eurodollars/hike expectation have certainly played a role, but how much is already priced in? I would say as we get to Dec that we may be due for a reversal, since the idea of going all the way down to parity seems very exotic, especially when analysing the difference of magnitude of the Italian referendum to Brexit/Trump. And lest we forget, it's just an extra 25bps with a probable deferral of the next hike to some distant time in the future (we don't want to tank spooz do we?), as long as PCE allows it. I'll probably hedge some before the referendum.
Thanks for your post abee, I've been considering going +ES and -TF as I still dont have the courage to just go -ES, because it feels like JBTFD will still prevail in case of a correction because... TINA.
For the time being I'm still keeping my major longs, while watching bonds for a "cant be ignored sign":
PSX - hoping for Trump/Buffett to do something, while being comfortable with holding it long-term
HCA - Trump already said he agrees with some parts of the Affordable care Act, how long will it take him to realize that the only solution to this problem lies at the core and that the premiums are just a corollary of the exorbitant prices for even a blood draw in the States? I don't see sick people and families accepting a major shift to the status quo without a fight
COR.LS - my best long of the last 2 years, as a play on flight to quality without being on utilities, preferreds or REITS
As for commodities, I seem to always be on the wrong side of that trade, so I have my binoculars on to keep a safe distance from getting the usual couple of stop losses
I think you underestimate the Italian vote. Superficially it appears minor comparative to Brexit/Trump. In my view that overlooks the accumulative process of what these votes represent and if the Italian vote goes anti EU then next April the French election will attract an ever increasing risk premia that the EU future in it's current form looks unsustainable. In currency terms this would be massive beyond anything that Brexit/Trump implied.
ReplySomeone asked me back awhile what would carry the dollar over parity on the long term 5 year chart. Well, a EU politiucal crisis would do it.
Yeah, it really feels like shorting USD would be a dumb move here, but with the big number nailed we might take profits in our long UUP position today. The carnage in MXN seems to be coming to an end after an epic move.
ReplyThe RSI for TLT is at its lowest level since 2007, so that's not yet a recipe for a rally. We do think a tradable bounce is within sight, and the Kevlar suit and gloves are now close at hand. Long term support levels are already in view for the long bond. Lower quality munis and preferred stocks continue to be hammered by a rotation into bank stocks, but it's a Dash for Trash.
There is a lot of mostly erroneous chatter out there about munis, tax exemptions and changes and the like. The ensuing panic is already delivering tasty yield to the door of those yield hogs more cynical about the likelihood of (a) reflation (b) tax reform (c) massive infrastructure spend. As if you could even attempt (c), if the muni exemption was abolished. C'mon, people!?!
US10y hit 2.31% today, the long bond 3.07%, and the 2y 1.02%. Dame Janet's rate hike is now baked in the cake, and she will not have to worry about moving markets. In fact as MM points out, it's more likely that her dovish utterances regarding future rate hikes will spark a buying spree in fixed income.
ReplyFor those newly minted reflationistas, a reminder that CLZ6 is trading between $42-43 today. Reflate that. Btw, MM, as a vehicle for shorting copper, FCX?
LB - FCX is not as clean a correlation with copper as it used to be a few years ago, partly because of the oil exposure they acquired in 2011. Id just go with JJC, has the usual ETF imperfections and may be hard to borrow but I assume your holding period is not a decade!
ReplyNice trades, MM.
ReplyI thought Scaramucci's (Trump economic adviser) Opinion piece in Saturday's FT was interesting. #1: we are going to test secular stagnation against pro-growth policies of deregulation, infrastructure spending, and tax reform. #2: "Tariffs are unnecessary if agreements like the World Trade Organization and Nafta are adequately enforced."
For anyone shorting rates, know that at some point the secular stagnation argument is going to re-assert itself. Also know that it may not be until '18 that we start seeing the effects of Trump's pro-growth policies. I'm inclined to be short rates, but it would be a trade for me as the arguments of over-indebtedness and demographics are pretty convincing. I just don't see sustainable high real growth rates.
The bit on tariffs and NOT ripping up Nafta is interesting too. Trump and his advisers (including Wilbur Ross) seem to be walking back the campaign rhetoric. And yet, the peso isn't rallying today (against the USD). Bad sign for MXN. Some banks have talked about shorting EM Asia as a play on trade under Trump, but I'm unconvinced. If anything, I'm tempted to go against consensus, as currencies like KRW and TWD have large trade surpluses and will have to tone down their FX intervention going forward. Should one be thinking of going long those currencies against G10?
Re G10, I note that DXY is looking bullish and the Fed (especially the part of the Fed that has Yellen's ear, like Brainard) have focused on dollar strength's impact on inflation/economy in the past. I still see a Dec hike, but I think MM is wise to take off the eurodollar steepeners. Separately, EUR is in trouble over this Italian referendum. The polls look like a "no" vote is coming and while many have convinced themselves that it won't change change the political situation much, I was not reassured reading this today in Bloomberg:
“I’m not capable of staying in the swamp,” Renzi said in an interview on state-owned RAI television on Sunday evening. “You stay in power as long as you can change things.” The premier stopped short of saying explicitly he would quit if he loses, saying: “Politics isn’t the only thing that counts in life.”
As for my own macro book, I covered short in gold last night and am watching rates (I didn't want to chase this move given that futures prices were far away from where they were when the cash market last traded on Thursday). I'm holding short on EUR against CHF and SEK. Assets are 100% USD-denominated.
I'm trying to work out how I can buy mexican bonds,.
ReplyHave shorted dow ( again trying to pick a top). Seems everyone is pricing a certainty over Trump policy. I still see it as uncertainty so there is plenty of room for a reversal in the faves. eg Dow stocks.
However I do believe that he has tipped bonds over an edge they were far too close to anyway.
Not easy. I ve taken a lot of risk off the table replacing it with an uber-spivvy short in dow with a stop around 19000.
LB closed his UUP long (that long UUP/short WTI theme really worked out well) and has begun to nibble a tiny bit in the muni space. The bottom in fixed income may take a while to carve out here, but that will give punters several opportunities to ride the bounce. Once the secular stagnation theme sinks in again, this week will look like it was a good buying opportunity. Certainly we just saw a >3 sigma event in rates, and what may prove to be a reversal candle for the long bond.
ReplyIn terms of contrarian trades, long bonds and short XLF is a combination that seems to make the most sense, short term. It's all in the timing, though, we don't want to jump the gun on the XLF here while crazy retail punters are still being sucked in. It's very likely that there are still quite a few sheep who are panicking out of bonds, but haven't left the pen yet, as the usual herding behavior comes to a conclusion. We like the idea of doing very boring things on the long side for the rest of Q4 and Q1 '17 (munis, preferreds, Treasurys) while taking a few small punts on selected reflation trades from the short side (banks, materials, energy).
The dollar shorts have really been cleaned out after an unscheduled visit to the proctologist. We may be reaching a pause on this latest sharp move by Bucky, but there is no way we are risking getting on the wrong side of that, not while CNY continues to bleed - so we'll stay flat FX for the time being.
just gone short IWM but QQQ also looking pretty vulnerable. Almost head and shouldersy...
ReplyI'd love to hear from any equity PM's here.., Al you in the house? how much further can this rotation go. Smacking down Googl/FB and staple fav like STZ and buying the banks? I'm thinking of selling some of my financials but given that we just broke out on big volume, that might not be the right play
ReplySold some IWM, back at it previous peak. Tight stops. And covered my LQD short.
I think this rotation can go much further. Stable/low beta stocks and the FANGs have become so much overowned. Even many of my peer value fund PMs started to own AMZN or GOOG big size by giving them high growth rates forever to make them look cheap - and on the other side most value managers gave up on the banks a long time ago.
ReplySo short term a correction seems overdue but I am really expecting a tetonic sector shift due to rising rates and inflation expectations.
And it seems indeed that active macro is back again! Great comments chaps. The Brexit trade was long FTSE 100/short FTSE 250 ... the Trump trade is Long financials/short FANGs, ok, so far so good then. But I still don't like the massive increase in yields combined with the obvious leverage in so many parts of the equity market, NON-financial equity market mind. So maybe this sector story can run further, but I think beta is in trouble here, re Pol's comments.
Reply@abee - nim sensitivities for big US banks range from around 0 to 10% - to put this into context a 200bp move for JPM would more or less equate to an ~.80 increase in annual EPS, but so many moving parts to this analysis that its really fuzzy. Is 200bp enough to break the credit cycle? Because if so this bank rally is a top. The research I'm reading seems to be converging on "buy the banks now for a multi-year cycle of rate increases". Personally, I'm passing - I'm not a long only guy, but if you are running a long-only book and need to protect yourself from rising rates, there are a limited number of places to run.
Reply@Checkmate
ReplyI may very well be underestimating its consequences. Let's assess the outcomes:
If Renzi wins, the most crucial change would be that the winning party would always have a majority with 340 seats out of 630. This would mean that "something" in the 3rd-greatest EU economy would happen, instead of the historic political gridlock and policy inaction the italians have grown to accept (?). This can be a good or a bad thing, depending on the "something". To note is that every decision relating to the participation of Italy in the European Union would still have to go through the Senate. He tried to adjoint some populist measures to his electoral law in order to increase his chances of winning, such as reducing the number of "politicians" and threatening to resign if the No wins (which backfired beautifully). If one still believes the polls, with confidence intervals and what not, this doesn't seem to be going his way. I reckon, if the "Yes" wins we will have a relief rally or Trump effect.
If the No wins, Renzi is likely to stay in power, at least during a possible transition phase. And in his mind, when he thought all of this up, that was it (cue incertainty, loss of confidence, increasing yields, maybe recession, etc.). I don't think he counted on lighting up a Leave EU movement. In case this happens, I don't see Italians wanting to leave the EU.
Still, and here is where I may be underestimating the consequences, if the Yes wins and new measures are taken, I don't see them holding much sway if Brexit turns into hard Brexit and Trump starts keeping his promises. On the grand scheme of things, Europe will be the fifth wheel. And if the No wins, I think Italy will just muddle through and remain in the Euro. But yeah, it would be another point in history of anti-EU sentiment which could very well take the euro to parity. The AfD popularity worries me most, maybe in part due to a proximity factor, but also because if we are seeing it in Germany, nothing is stopping every other country of joining in against an unified Europe.
@T - I agree that the higher rates = good for financials thinking is far too simplistic - even in past cycles where the yield curve slope actually reflected true market expectations, financials need a sweet spot of high real growth and low inflation that result in those higher long end rates - financials have horribly underperformed in pretty much every other situation, especially the stag-flationary scenario. Nothing that Trump has suggested solves the fundamental productivity problem, so we may get a steeper earnings growth trajectory, but its not at all clear to me why P/Es can stay this high.
ReplyBut in the end, this is all just notions of decoupling 2.0 with dollar strength except this time small caps and not US tech is being considered a beneficiary - didn't work in 2000 and 2008 and won't work now. Want to trust some wishy washy fiscal plan without a crisis to ram it through, while a guaranteed Fed put, ZIRP, and the dollar call sink into oblivion? If I am Janet Yellen, the best FU to the Trumpers would be to raise rates 250 bps in December - enjoy that bridge building as the dollar goes to 120!
@washedup,
ReplyFinancial is rallying based on both the rate hope and deregulation. There are several possible factors supporting current rallies besides rates and deregulation: positioning near the end of year to chase return-maybe we have an early santa claus rally, the end of election-political risk premium disappears, and unified GOP gov+legis-some pro-growth fiscal policies.
Of course market is going to overshoot on these expectations. And I think this rally might have a leg till early next year for one reason: if they are going to lower tax rates, shouldn't investors take profit in 2017 rather than 2016? The real money is likely to stick to their long positions. In this case, the sector rotation could see Tech comes back as a leader.
@Med
ReplyWhere we differ is you are looking at the consequences of the Italian vote only in terms of Italy. My point made earlier is that it carries wider possibilities particularly so if it is yet another anti establishment NO outcome. In that event I simply do not believe the market will ignore the consequences for the much more important European elections next year. I strongly believe the market will price those outcomes in which carries large ramifications for currency and bond positions.
Of course it may break the cycle if Renzi wins, but do you want to bet on that?
135 bewildering points higher than cover level it is impossible to stay out of the game (you can say anything about the limit down rule it forced bears like me to cover and saved the day post election, much like Martin Luther King monday of 2008 - so you don't get -12% gap down like in Europe last Brexit)
Replynice repricing in banks, supportive for equities sure but there is a limit to that - rates are going up and this is the big big story hiding behind the bank stocks short squeeze
80 lots half size short here - good luck