A Call to Arms: Give Us your Best Trade Idea for 2018...Can We Beat Goldman?

When I posted a retrospective on Goldman Sachs’ 2017 Top Trade ideas, I thought the internet would jump at the chance to whack the squid with a shovel. The MM audience reacted with a collective yawn, as if to say, "hey, take it easy on those guys downtown..." Who knew there was such decorum, humility and understanding out there…

Quick point on rates...most interesting thing I saw in the markets this week was the Citibank US rates team alluding to a big long-end UST flow from domestic pension funds. This ties into the point I made about price action implying a distinct flow in the market due to the divergence of the long end of the treasury curve with global breakevens relative to oil prices. Once again today the long end dip got bought in size--this trend isn't going away soon.

This Japanese flow also would explain the richening of long end swap spreads. Other commentators have credited the move in spreads to Trump’s easing (or expected easing) of Dodd-Frank regulations--the move seems a little too fast in the long end for that explanation--the reality is probably somewhere in between. There continues to be a ton of demand for long end paper, despite great minds from Goldman Sachs to JP Morgan to Gundlach telling us rates are going higher.

All of this ties into today’s post, which I hope turns into a conversation. I have a request of the great Macro Man readers:

Send me your Top Trade Idea for 2018. One actionable trade, and 1-3 sentences on why you like it. Post it in the comments or email it to TeamMacroMan2@gmail.com.

I will aggregate the results and post them with names removed early next week.

For those looking for some inspiration, I submit the following…

In 2017 someone out there coined the term  “The Everything Bubble”, which is meant to imply there is a bubble in, well, everything. If you buy into that, maybe you can get a few ideas from this piece, “What Could Pop The Everything Bubble” by Charles Hugh Smith.

And in honor of the Macro Man poetry tradition:

At length corruption, like a general flood,

Did deluge all; and avarice creeping on,

Spread, like a low-born mist, and hid the sun.

Statesmen and patriots plied alike the stocks,

Peeress and butler shared alike the box;

And judges jobbed, and bishops bit the town,

And mighty dukes packed cards for half-a-crown:

Britain was sunk in lucre’s sordid charms.

-Alexander Pope, as quoted in the introduction of the South Sea Bubble Chapter of Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay

And if you were the kid that cheated on your exams, here are the Goldman Sachs Top Trades for 2018, along with my thoughts on each.

Top Trade #1: Position for more Fed hikes and a rebuild of term premium by shorting 10-year US Treasuries.

Shawn’s take: I’m with Goldman on this one--global growth synchronization will finally push inflation higher in enough places to get the attention of those that have power-flattened the curve this year. Term premiums aren’t dead, they’re just sleeping.

Top Trade #2: Go long EUR/JPY for continued rotation around a flat Dollar.

Shawn’s take: i’m the other way on this one--I think Japan is waking up after a long slumber and will continue to benefit from Asian demand.

Top Trade #3: Go long the EM growth cycle via the MSCI EM stock market index.

Shawn’s take: Compra! EM cycles always last longer than you think...we’re only a year into this one, and no signs this will be any different.  

Top Trade #4: Go long inflation risk premium in the Euro area via EUR 5-year 5-year forward inflation.

Shawn’s take: Didn’t I just write about this? It is cheating to have the same idea in 2018 as you did in 2017. You just made a small tweak to make it look different. I’m agnostic on this one--as noted I prefer the TIPS version.

Top Trade #5: Position for ‘early vs. late’ cycle in EM vs the US by going long the EMBI Global Index against short the US High Yield iBoxx Index.

Shawn’s take: Long EM credit vs. Short US HY credit….I like the theme but I don’t see how you make a bundle of money on this trade. Too clever by half.

Top Trade #6: Own diversified Asian growth, and the hedge interest rate risk via FX relative value (Long INR, IDR, KRW vs. short SGD and JPY).

Shawn’s take: This carries nice, with solid fundamentals throughout and BoK starting a hiking cycle...but a lot baked in here already. Consistent with their global theme, though.

Top Trade #7: Go long the global growth and non-oil commodity beta through long BRL, CLP, PEN vs. short USD.

Shawn’s take: With an election coming in October and reforms still undone, you need to buy into the Brazil local story in 2018 to like BRL. I do...CLP will be more correlated to the global factor if Piñera wins the election, which he probably will--although the stakes are rising after his opponent recently took to quoting Che Guevara. Goldman thinks CLP will be supported by “what opinion polls suggest is likely to be a market-friendly outcome in the upcoming Chilean Election.” Maybe, maybe not...but the business community will lose its mind if Guillier wins. The risk/reward there is simply the wrong way around.

There you have it...There’s probably no way to benchmark this, but what I would like to do this time next year is compare our “Wisdom of Crowds”  approach to Goldman’s ideas and see who comes out on top. So here it is...your chance to put it on the line and step into the ring with the mighty Goldman.  Goldman is Apollo Creed. Macro Man is Rocky. Nobody believes in us but ourselves.

Shawn
TeamMacroMan2@gmail.com
@EMInflationista

Correction 12/6/17: This post has been corrected to fix Citibank's attribution of long end UST demand to be from domestic pension funds, rather than Japanese pension funds.