P/E's are re-rating

Its been a long time, we shouldn't of left you



While its been a while since I posted here, not much has really changed in financial markets this year. People still worried about China, US FAANG stocks still going up, Europe is always a mess.

While there have been moves in sectors and markets this year for sure (EM and Frontier managers have been busy) the real big change in markets, which perhaps still needs many more months of digestion is the rise in US Long rates (ie 10 and 30 years). Since breaking the psychological levels Gundlach and others have mentioned as 'lines in the sand' price action has been pretty boring. But I do tend to agree with them that rates have entered into a new regime.

Of course the first asset class to react to higher rates was the Dollar and EM. They seem to have quite a bit priced in already and add in a pinch of China slowdown concerns its easy to see why they have under performed. I dont have much to add. Perhaps they are oversold. You can add in US homebuilders and Capital Goods to that list as well.

The next to go IMO has been parts of the duration trade. Muni's, preferreds. They have moved a little but they can still move a lot more if rates go much higher.

The last to go, and we all knew it was going to take more time than markets, was the US stock market. Its been the best place to be for the past several years and its more of a growth vs value play which means rates matter even less.

If you only follow the price chart, you could be forgiven for assuming the current bull is intact. I'd have to agree as there has yet to be a flashing 'dow sell signal' yet. Though I could easily see a topping pattern set up from here.

But lets turn to a few charts of the market P/E and EPS, which combined give you the price.



You can see that for most of 2017, 17.5x PE was a nice level the market was supporting. Then in January, when analyst estimates really got revised higher for the tax reductions we dropped down to 16x. Its been hanging around 16-17 for most of the year and on the recent dip, dropped below 16. Some, like Morgan's equity strategist now see 16 as the ceiling for the market, not the floor. His reasoning is that higher interest rates impact investors risk premium. Something to think about. Russell seems to have go the message loud and clear


While companies in the US may still be beating earning and buying back shares, its possible that investors re-rate regardless. 


Now what happens is EPS estimates start to turn down, like they are in Europe. Well then that would be cause for real concern. But we're not there yet. 







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Leftback
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November 29, 2018 at 4:25 AM ×

@IPA: I hate to argue with you b/c you are intelligent and tenacious. But you are trading the 70s for some reason, this situation here is more like Japan's deflationary decades and with a bucket of QE that the Fed will not be able to unwind in full this time around, which makes Treasuries the new Widowmaker.

You simply cannot have all of these together at the same time:

1) A US slowdown/recession
2) Equity/commodity bear market or deep correction
3) Bond bear

2) is deflationary and just not compatible with 3)

Trust me, even if foreign buyers desert Treasuries (they won't), those punters will be replaced by domestic buyers once 1) and 2) set in seriously. If you don't believe me look what happened in Japan. Beware the Widowmaker my friend !!!

Now can we get back to the swing trade du jour, the face ripper, in which we have partaken so recently? Let's just get this one out of the way before we address 2019 Macro themes? Apologies again for short time frames, it's who we are.



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Nico
admin
November 29, 2018 at 10:32 AM ×

got out of 500 Europeans long during Spooz liquidation squeeze time last night - am gonna buy my mother in law the new X5 and will go art hunting in Budapest. Great American rally but the incredible weakness of Europe (Dax foremost) is telling the same story: more pain ahead

i wonder if Dax is preparing our made in Europe Lehman moment: DB bankrupcy. Dax is headed to 9000. If Monday trades rich courtesy of G20 i will reenter Stoxx short. I hated being long (vs. Spoos short of course), i hated every minute of it it's bad for my bear health

i'd say, all eyes on US corporate credit from now on, the yield compression starting to crack. AT&T should follow GE soon. Good luck

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Unknown
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November 29, 2018 at 11:04 AM ×

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Unknown
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November 29, 2018 at 11:06 AM ×

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We strive to leave a positive lasting impression by exceeding the expectations of my customers in everything I do. Our goal is to treat you with dignity and respect while providing the highest quality service in a timely manner. No social security Number required and no credit check required, 100% Guaranteed. Kindly respond immediately using the details below if interested in a loan and be free of scams..

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Anonymous
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November 29, 2018 at 8:04 PM ×



Technology stocks are shocking I tell ya...the instagram stock that keeps on giving.

https://www.dailytelegraph.com.au/entertainment/sydney-confidential/is-this-aussie-model-cat-mcneils-most-shocking-post-yet-three-hoes-in-a-row/news-story/fc3b2027388f0dc5e7e2a88e71776776

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Leftback
admin
November 29, 2018 at 8:22 PM ×

Powell, Trump. The dovish nod by Powell was probably a way of getting out ahead of the sleigh. If you think about it Powell has cleverly installed himself as the lead dog for Santa, and Trump knows if you're not the lead dog, the view is always the same.

Powell doesn't want Trump to be able to cast him as The Grinch, so he dons the Santa suit early before Trump can get his hands on it. Now if Trump f***s everything up at G20 the only way to save the Santa rally would be more Dovespeak from Powell. These bankers aren't stupid, whatever we may think of them.

AAPL making higher lows... the continuation of yesterday's move suggests additional pain ahead for Mr Shorty in the equity arena. The employment data today are a bit of a worry for inflationistas and all that tight labor market business we keep hearing.

One more Pain Trade ahead. The Bond Bears may be the last group to be chased back into the woods before EoY. We are back in that mode where weak data is good and strong data is bad. Why? Because the Fed blinked, that's why.

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Leftback
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November 29, 2018 at 8:26 PM ×

Maybe someone should do another post so we can refresh the space and allow the commentariat more room for pontification. Not to say "I told you so", btw, to our illustrious proprietor re: Powell blinking, but: "I TOLD YOU SO".

Respect, yo. We're all mates here innit.

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Nico
admin
November 29, 2018 at 10:05 PM ×

old geezers here know i've been ranting about US corporate buy backs to no end (the combination of tax cut and buyback being the only reason Spoos went up since 2016) ranting loves company so here is Ritholtz piece:

https://ritholtz.com/2018/11/bad-buybacks/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+TheBigPicture+%28The+Big+Picture%29

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Anonymous
admin
November 29, 2018 at 11:34 PM ×



"(the combination of tax cut and buyback being the only reason Spoos went up since 2016)"

Is that so...wouldn't known that since that particular instagram stock was taken down around two years ago. It's called grooming.

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Anonymous
admin
November 29, 2018 at 11:58 PM ×



Well, Nico...having lived through a bear market I know how the technology shops work in a bear market. You can walk in and change the companies furniture, buy and replace the old photo's on the wall...but you can never change the fact that of what will always be concealed in the accounting books... that it will always be that one hoe within the three hoes in a row.

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Nico
admin
November 30, 2018 at 11:34 AM ×

there has never been real mark to market book keeping in US banks the GFC. The US will follow Italy's fate next year

2019 themes are: US High Yield CCCs, leverage loans, and the a creative accounting that has to come to light

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IPA
admin
November 30, 2018 at 4:45 PM ×

@LB, except for a few bad apples we all get along here pretty well and respect each other. Powell's playing a game of words to please his boss and keep his job has everything to do with econodata that may still force him to do his job. I don't see any major data softening yet and this morning's Chi PMI is a good example. I didn't say anything about the recession or stock market selling off further, so that crosses through items 1 and 2 on your list above. Besides, we just had equities and crude oil puke, and what did that do for TLT? The jury is still out on domestic buyers replacing foreign, and I'm not too keen on that aspect yet, so our mutual speculations cancel each other out.

@Cbus, inflation sometimes surprises and it's a serious shock that suddenly makes everyone run for the exits. Predicting one is easier when the trend is on a steady upclimb - annual CPI inflation is up from zip to 2.5% in the last 3 yrs. I really don't know what TLT does in the next week or two and this just goes back to zooming out for Pete's sake. TLT is down 21% from its all-time high and up just 3% from its most recent low. Gigantic head and shoulders is in making, since you mentioned the technicals.

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Cbus20122
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November 30, 2018 at 9:14 PM ×

@IPA, 3 years into a negative bond trend, I don't want to be betting on further breakouts as the economy is showing signs of slowing down. I like to operate in rate-of-change land, and most of that data for the economy is high, but starting to trend lower, which is bullish bonds in the short term.

With that said, I noticed a really interesting item today that perhaps is showing how the market is reacting differently this time due to how low rates are. Take a look at the 5-2 yield curve. It's already almost inverted. Now, compare that to the 30-10 curve. The 30 year bond is hardly moving, and the 30-10 curve is seeing a pretty intense steepening. This is really really interesting to me.

To me, I'm kind of interpreting this as exactly what I've been thinking where bonds don't look great from a very long term perspective, but the short term perspective seems to be very bullish on bonds. Interestingly, this seems to be the pattern of the two curves post-2007. The 30-10 curve rallies during risk-off, while the 05-02 curve drops on risk off moves.

So overall, I tend to think mid-duration is probably better right now.

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Anonymous
admin
December 1, 2018 at 2:47 PM ×


Lefty, how you think my market ratings went this year...did I line up those matchbox cars perfectly?

A bored amps...is not a good amps some may say...I can't help it.

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Nico
admin
December 2, 2018 at 5:12 PM ×

"The presidents want the markets to enjoy Santa rallies first," Junheng Li, the founder of the China-focused research company JL Warren Capital told Bloomberg about G20 truce

what a vision - i'll go back to personal favourite 'Nixon in China' opera

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Skr
admin
December 2, 2018 at 5:51 PM ×

Nico, as you are more macro than most on here, which do you envisage - a Trump opera or a 6 hour Kevin costner film?
End result is the same?

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IPA
admin
December 2, 2018 at 6:40 PM ×

Xi is simply trying to stall the process while waiting out Trump's term. Bloomberg has a good graphic showing the difference in spin on the truce.

https://www.bloomberg.com/news/articles/2018-12-02/u-s-china-trade-truce-side-by-side-comparison-of-statements

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Leftback
admin
December 3, 2018 at 1:59 AM ×

Italy, the Fed and now tariffs, all major areas of concern, removed one by one (if only in the short term). Are there more surprises in store? This week has been a huge win for those with a cynical view of markets and their manipulators.

Well here it is, Merry Christmas… the Santa rally in equities is going to happen after all. Interestingly, this will probably bring the odds for a Dec rate hike back to 100%, which will mean this move is somewhat self-limiting.

and so, verily, it came to pass, even as LB and his ilk hath predicted, and after creeping up behind Mr Shorty last week, Ye Olde Face-Ripper has finally arrived as predicted, but in the most uncomfortable way for shorts as we are going to see a 40-50 point gap open in the SPX. Monday has the potential to stretch into a 3% up day if there is a serious squeeze. I believe there are enough shorts and volatility tourists in this market for this to happen, and they will be pounded until VIX is <15.

Of course, those of us who remember bear markets know that 3% up days only happen inside bear markets. Anyway, it's here and there is nothing anyone can do about it. This is going to last 2-3 days before a stall, but while it lasts it is going to be Max Pain for a lot of punters. The interesting thing to watch will be the internals, to see which sectors outperform.

IPA is probably correct in suggesting a period of weakness ahead for Treasuries as the relief rally in risk assets rolls on. However we think the duration and magnitude of the sell-off will be limited. US10y back up to 3.08-3.09%, at most.

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Anonymous
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December 3, 2018 at 10:17 AM ×



You really have to open your eyes if you cannot see what I'm seeing with the hedge funds. The hedge fund letters are your typical rope a dope , while their plebs are at work with shares like the alphabet. The top end of town need to save face in a bear market...and the plebs just want their 15 minutes of fame, all be it ...on the way up ,or it can be on the way down...you really need to spend some time with them to know what I mean. Its bit like fighting the rebels in Cuba in the 50's. You can trade this market up and down all day and week long...they will still be incentivized to trade against you on the basis that you eat out of different color bowl or wear a different color handkerchief. It doesn't matter to these hedge fund shops what you say or show them...they will still incentivize the plebs in their cubicles to do there best to drive one mad in their numbers by spoofing or ramming the close within your workplace environment until their 15 minutes of fame can become permanent. Let's delve deeper into that scenario. Permanent, what would this look like you imagined if looking into the future...atrocious. Let's leave the computer models, and the trading angels and actress's to their Santa rally and what not...Amps just wants to get out of dodge and lay on a south east asian beach and punt away.

As for you...little fella. Good luck with you little mate nat. He his a fine little companion I found. He can relay a cryptic twitter message within the time it takes me hoover a thumper after an enforced 20 year drought.

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Leftback
admin
December 3, 2018 at 5:49 PM ×

Just as we were anticipating the year end rally rolling on, a funny thing happened. The yield curve inverted at 3s5s.

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Cbus20122
admin
December 3, 2018 at 8:27 PM ×

The "santa claus rally" is nothing more than an excuse to squeeze out shorts just like most bear market rallies.

With that said, I'm expecting big infrastructure stimulus from both China as well as the USA at some point in 2019 (possibly early). We'll see where this goes of course, but markets aren't going to materially drop until earnings start to materially come down, and for that, we'll need to wait until at least mid January. All we've had so far is a peaking in earnings, we haven't even had material declines quite yet.

Keep in mind, the 2007 / 2008 top didn't "crash" until over 1 year after the market topped. Until that point, the markets had a slow roll downward as we saw growth slow, earnings slowly revise downward, and credit problems showing more and more cracks. 2000's bear market of course was even more drawn out. But I do tend to think there is potential that we''ll hit a systemic moment during the upcoming bear as a result of illiquidity, which may create a more violent downward move than we've seen in a very very long time.

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Cbus20122
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December 3, 2018 at 8:34 PM ×

Of additional note, the 5/2 yield curve is about to invert as well (sitting at .001 spread right now). The interesting part of this big move in the yield curves is that it seems like its a very sudden and material switch away from the front end of the yield curve and into the long end. So this is a bear flattener. Being the first of the month, have to imagine a lot of the alg's are picking up on 1 month long bond momentum along with repositioning into flatteners.

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fcp
admin
December 4, 2018 at 3:48 AM ×

Everyone seems to be expecting a christmas rally, perhaps the path of most pain is the opposite direction.

At first glance, a less hawkish fed and a trade truce addresses the two main market concerns (at least partly). But that could also be the end of the good news in the short term... the next item on the agenda is a rate rise.

A few weeks after the one in September equities were down 10% across the board.

This is a much more skittish market

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IPA
admin
December 4, 2018 at 4:24 AM ×

@fcp, good point. But market is worrying about a slowdown more than rates going up. Both Chi PMI and Mfg ISM had pretty strong employment component. So, perhaps a very strong Novermber NFP would not only be a good confirmation of economic strength but also a boost for TNX. I think the stop scoop below 3% is a good spot for treasury bears to reload. It coincides with 116 resistance on TLT. Equities may close the US-China trade truce gap first, but I am with @LB and @Cbus on this rally to continue into the year end. That being said, I would be interested in adding to my homebuilders, REITs and retailers shorts on the futile pump.

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Anonymous
admin
December 4, 2018 at 5:51 AM ×


IPA. I wouldn't be adding to homebuilders. The advertising of interest rate is going through the same cycle as previous economic booms. It will sing and dance that he knows best and everyone else is at fault. But as he gets older , the garbage gets louder, as he hasn't had an original thought since the 70's.

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Anonymous
admin
December 4, 2018 at 5:54 AM ×

Yeah, Yeah , Yeah...mate. I know. I'm stuck here...and your there with all your millions. But your still a myth singo.

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Anonymous
admin
December 4, 2018 at 6:01 AM ×



singo, i wouldn't stand in the same room as you, especially if I was wearing a skirt. tough guy. and tough guys hang around other tough guys.

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Anonymous
admin
December 4, 2018 at 6:05 AM ×



singo from sydney...the tough guys tattersalls club.

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Nico
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December 4, 2018 at 6:43 AM ×

you guys are being far far too cute on this new bear market - I understand after 10 years it is hard to let go but you should whack a mole on every rip now. the pending implosion of US corporate credit is here no matter how much Trump wants to bring US economy back to the 1950s, making car at $16 an hour and all that

as expected I reloaded all shorts on Monday gap and back to being MM villain after a horribly profitable trip on the long side

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Nico
admin
December 4, 2018 at 7:31 AM ×

2s5s now inverted. Nikkei crashing at one week low. Dax weak as Bush Sr. Those market leaders, top exporters don't believe in trade truce but in trade depression. JPMorgan arguably the fiercest cheerleader of the bull game those 10 years now recommends cash over US equities. Being long for Santa is picking ecstasy pills in front of steamroller.

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Leftback
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December 4, 2018 at 1:54 PM ×

I think we can now say that @IPA's short-term chart read in bonds was wrong. I can't state exactly what the dynamic is in long bonds but as MM used to say, it seems that someone is buying some. It looks like the flatteners are on again.

I venture to suggest that what has changed in the bond market is that US inflation drivers have collapsed, and that has been reflected in break-evens diving and finally a squeeze at the long end to match the one we have seen in the belly.

We are staying with some equity longs (most are rate-sensitive) for the time being. No index longs here, that's for the real 5 minute macro crowd. I think we are going to see some good days for munis and other battered income vehicles, e.g. REITs.

I cannot see lower rates being excessively bearish in the present environment, and like @cbus I expect the rally to resume at some point, until we hit the really hard resistance levels, which are fairly obvious to all. I am in complete agreement with @cbus comments regarding earnings, and that large scale towel-chucking will not occur until the next earnings season. This in turn implies that the coast is clear for a Santa Claus rally into early January.

At the moment the dominant theme seems to be not "imminent US recession" but rather "Imminent FOMC policy error" and that is being reflected in a variety of unusual dynamics in rates. This means that the Fed will hike in December, and that this will subsequently be viewed as a mistake, which implies lower rates ahead at the long end.

OK, that is it for today. Enjoy the pull-back.

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IPA
admin
December 4, 2018 at 2:01 PM ×

@amps, I'd be "adding to my homebuilders shorts". As always, you are not paying any real attention to what's being said here. Just skip over my notes, pal.

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Cbus20122
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December 4, 2018 at 3:36 PM ×

Even if we don't see huge drops until next earning season, I think at this point, any further rallies will be quickly sold into. We may go up slightly, but I can't see it being meaningful or all that profitable in the long run. I do know right now that there is a good discount in volatility, making this a great time to load up on long-term puts, which is what I'm doing.

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Leftback
admin
December 4, 2018 at 4:49 PM ×

Just a quick note on TLT.

We own a pile of TLT. But it is overbought here, has pierced the upper Bolly band which is bullish longer term but suggests a pullback is ahead. TNX has found support at 2.94% so a spot of mean reversion back towards 3.00% would not be at all surprising.

TLT has filled a number of gaps this week and last, and might fill one more to 117.27 before taking a breather. There is strong chart resistance at 117.50 or so, which sort of defines any short-term trade risks.

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Nico
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December 4, 2018 at 5:38 PM ×

you got your steamroller

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fcp
admin
December 4, 2018 at 9:11 PM ×

Any theories why VIX is so low? I have been playing for a spike for two months now.

Feb was a liquidation of short vol strategies - fair enough - but even so you'd think the front month would be above 20 after a day like that, in a market like this.

Also... that merrill lynch most crowded trade picked the top in bitcoin, short vol, and called FANG/BAT. Does anyone know what their latest is?

https://www.google.com.au/search?q=most+crowded+trades+merrill+lynch&tbm=isch&source=lnms&sa=X&ved=0ahUKEwi7kLGNi4ffAhVaVH0KHelwDJ4Q_AUICygC&biw=1349&bih=870&dpr=2#imgrc=KSgOVDzEXgBEuM:

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Leftback
admin
December 4, 2018 at 10:48 PM ×

LOL @Nico. That was a garden roller, although if you were long small caps it was probably a bit nasty.

It was a very unusual day. In the old days we would have called this week, "Risk On/ Risk Off", remember that one? What was striking about today is it was such a classic risk off rotation - out of equities into fixed income. Old school. We called it "flight to quality" in those days.

TLT went from being overbought this morning to being the most overbought in a year. I think we will give @cbus some credit for this, in calling a Treasury rally on 11/29. How much of this was due to Fear of the Inversion is hard to say.

When yields move very very quickly like that, the possibility always occurs to us that important upcoming economic data has just been leaked to large participants (in this case, it would be the upcoming employment data). It's also possible that some large leveraged bond bears simply gave up and capitulated. With markets closed tomorrow, the reaction to the initial move in yields and equities was perhaps always likely to be exaggerated.

The question with equities is: is this the end of the world as we know it (again), are we just looking at a fairly wide range trading environment of ~100-120 spoos for the time being? AAPL remains some way off its November lows so we would have to assume the latter to be the case if we had to choose. We don't have any index longs.

SPX filled in some of the gaps it had created recently, as did several individual stocks. Once upon a time that was a fairly common occurrence. The upside (2800) and downside (2680-2700) levels seem to be quite well defined here for the time being, so this may not be the most difficult trade for those who practice swing trading.

If we had to choose one instrument to trade short-term here it would probably be TLT, as bonds seem likely to mean revert back in the direction of 3.00% on the 10y. We are also likely to see equities that benefit from lower rates continue to out-perform, once the selling pressure ebbs. mREITs weren't horrible today and utilities were slightly up, which is classic Risk Off.

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Nico
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December 4, 2018 at 11:11 PM ×

There is quite the queue to de-risk in US equities. Every new rip is gonna be shot at it's really hard to imagine 2815 will be beaten at end of year - n'en déplaise aux bonus - let alone first semester of next year. Is the Swiss National Bank out yet? it's not a panic for who panicks first..

DAX is really worrying. The last month looks like bearish zig zag begging to target 10000. A gap down below 11000 will leave a gigantic 2-year island reversal anyway you put it its the ugliest chart out there.

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Cbus20122
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December 5, 2018 at 2:52 PM ×

In fairness, I was somewhat bullish bonds looking for a breakdown in August before getting killed after yields shot back upward. Was a good headfake, but I still felt pretty strong in my conviction that for the next 1-2 years, bonds are going lower. So I was definitely early (that's been my problem all year), but didn't get sucked out of my core view.

I have a custom index I built that tracks a grouping of the most cyclical exposures of the economy (homebuilders, autos, semiconductors, hotels, shipping) along with some spreads and other more specific companies that tends to lead the broader markets. This index went negative around April, the same time that we started to see EM blowing up, and then turned sharply lower around August, and is still in pretty heavy decline. It's a great macro-indicator as these items historically head down before the rest of the economy for various reasons, so it allows you to time drawdowns and periods of weakness. Until this starts heading meaningfully upward, I'm not going to be positioned bullish in any real manner.

Next big thing to watch is the unemployment rate. Note big job cuts already announced or expected at GM and Ford. Also note that a lot of companies will unload jobs around the holidays (which is unfortunate, but part of reality). If this trends upward in an actual trending basis and not short-term noise, the bull is done 100%, and only ugliness can be expected from that point on. I've been watching initial claims recently and it has started to trend upward before the big auto job cuts, although it hasn't yet reached the point where I would throw in the towel.

There are also some interesting things going on in the land of liquidity as well, which has been growing all year. I can't say what is going to blow up (Enron, Lehman, LTCM, etc) but there is always a hallmark blowup in each recession, often kicking off the downturn. But I can't help but think we are going to get a shock implosion somewhere in the global econ sometime over the next 6 - 12 months.

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Nico
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December 5, 2018 at 9:46 PM ×

ZH: since the 1950s there have been exactly 3 years with a 3% down day in December: 1987, 2000, and 2008. And then this week.

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Nico
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December 5, 2018 at 9:47 PM ×

Cbus - if they don't manage to sell Deutsche Bank on time it will indeed blow up in the next 6 months

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Jill
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December 6, 2018 at 12:11 AM ×

Market may not repeat exactly but...

https://s3.amazonaws.com/cdn2.socialtrade.com/st/shards/23909_kOBXmmqR_l

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IPA
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December 6, 2018 at 3:33 AM ×

So what's this latest dump in equities? All of the old worries coming back plus something new? What is out there we can't see? Perhaps there is a skeleton to be uncovered in the closet? I dunno, so can't speculate, and really don't want to. I see no major economic weakness, it's in our minds but not in reality yet. Beige book today was not weak at all. We think the Fed has tightened too much too fast. We think homebuilders, automakers, hoteliers, and shippers are sending us a message about possible recession on the horizon, but in reality they are all affected by different themes and for various reasons not quite related to the economy as a whole. Don't want to unload an essay here on each sector's faults and negative drivers but there are underlying structural weaknesses in each group (rates, tariffs, demographics, new technologies and major disruptors, increasing competition, saturation, etc.) that are simply too many to list here in detail, with one exception - my notion on one of the sectors above (which I am short in a big way) - homebuilders are going down in any scenario: lower rates, higher rates, or stagnant rates. They are done for a while. TOL pretty much drove the last nail into the coffin yesterday.

That being said, @Cbus, I think this latest weakness in TNX shall also pass and it will be another head fake like the one you experienced in August. Kudos to you for sharing your losses as so very few here ever will!! In any case, I am glad you and @LB are enjoying a profitable trade for the last few weeks, but guys, watch out for a snapback above 3% on 10-yr and slow grind higher after that to yet new highs as economy does just fine and worries subside. I say it's not out of possibilty that NFP sends all weak TLT longs for the exits in short order. My vision is not short-term and I make no predictions unless 4 months out. You already know what I think about the matter and I'll add to the prediction in more stunning way by saying that I expect TLT to be in double digits by 2020. Call me a complete idiot, has been done here before by some, only to join me on the trade later.

But first, this developing US-China fracas over Huawei exec ain't helping risk and the trade talks better resume fast despite this extradition, or else risk is definitely off and TLT shines in that scenario.

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Nico
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December 6, 2018 at 7:10 AM ×

Russell 2000 it testing a triple bottom in Globex ... nasty leader. only Santa could stop temporarily stop this madness. Remember the Junheng Li truce quote I posted: "The presidents want the markets to enjoy Santa rallies first"

I just bought my Eurostoxx short at a depressed auction and will blindly trust 'The presidents' to pump the morale of buyers ahead of our RELIGIOUS holiday. Who wants a krach when Jesus is born?

disclaimer: still massively short Spoos (still underwater /2300) but at 2666 Stoxx profit since Trump elections dwarf spoos losses by a factor of 3

longer term, it ain't about the (CDO) AAAa like in 2008 but keep an eye on the BBB and the CCCs

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fcp
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December 6, 2018 at 9:44 AM ×

It’s just a bear market - no reason required. Fundamentals will come next, from a very positive base then when the news gets really bad and unemployment spikes, the next bull will start. Like 2007/2008 without Lehman, IMO. Even if this view is correct it’s not straightforward to position for it

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Eddie
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December 6, 2018 at 10:49 AM ×

Nico,

I agree that DB is a rolling trainwreck. But what makes you think that it will blow up within the next 6 months? So far they managed to muddle through, albeit with different degrees of success.

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Cbus20122
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December 6, 2018 at 2:27 PM ×

@IPA, I actually booked gains on most my bond positions already (owned so me April Calls). Yields may rally again, so I'm fine with taking profits, although still holding some longer term options here, but not looking to get back in as it's looking more oversold at this point.

But long term, bonds are looking good here. I'm very aware of the bear thesis for bonds, but I think the bond bears totally have the timeframe on their bearish bond call wrong. They've supported their thesis by saying the technicals support their view, not realizing that the bond market trades based off the logarithmic scale, even for yields. When you look at the technicals on a log scale, they align better with market history and also show that we're not yet in any type of a "bond bear".

Fundamentally, if we agree growth is slowing down and inflationary pressures are decreasing (as is pretty evident throughout all of the commodities complex), then all we have left is wage inflation which is actually a relatively small component of PCE, which is what the Fed bases their rate hikes on. The fed is going to stop hiking at some point, unemployment is going to start to pick up at some point relatively soon, and then we start to get the recessionary and deleveraging feedback loops kick in. The fed will be forced to drop rates at some point, and we'll get a big bond rally from that.

The other option is that we may get another enormous wave of worldwide CB stimulus that stops the growth slowdown before it starts to pick up steam (similar to 2016). But that scenario is also bullish for US treasuries. So I'm not really seeing much downside for bonds now. Long term? I think we have a whole lot of issues, but that's more of a 5-10 year problem for bonds than a 0-2 year problem. You mentioned other countries as not buying US treasuries, do you think that is going to continue?

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Anonymous
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December 6, 2018 at 3:23 PM ×

@Nico G, Northman called the next turd a few weeks ago: IJCs start rising and rising fast.

Agree, not 2008, but every bear has its totem and GE/DB may just be it.

FWIW,

Do not think that I have come to bring peace to the earth. I have not come to bring peace, but a sword. - JC

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Cbus20122
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December 6, 2018 at 4:18 PM ×

Also, another note on bonds. We still have MASSIVE parts of the global market operating on a risk-parity basis. These funds were very long US equities and had a relatively low exposure to bonds after the last 3 years of low volatility and bearish bond action.

So long as these structures exist, we will get bond rallies during periods of slowing inflation, slowing growth, and general risk-off sentiment. Like it or not, the world as a whole still view US treasuries as the safest yielding asset out there, so until that stops, treasury bonds will keep being great risk-off assets to own.

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Leftback
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December 7, 2018 at 1:56 PM ×

LOL. Much ado about nothing in the jobs data - the real market mover is OPEC. The market reaction may say more about positioning (mini squeeze ongoing) than supply/demand dynamics - yet we may now have a bottom in Brent.

Apologies for radio silence, wrote a comment yesterday during the chaos but Blogger ate it and couldn't be bothered to type it all again.

So we did have a face-ripper, in Treasuries!!! The massive over-positioning by speculators who were short Treasuries was always going to end badly - for them. The crescendo like plunge in yields yesterday feels like an exclamation point. Has anyone ever seen a 10 bp move in 2s before? Can't say that I recall that happening. Blame idiotic hedge funds and leverage.

Quickly, we think that TLT is now very overbought and lightened up yesterday. In equities, utilities are overbought and that might make a good sort for anyone feeling bearish. We will probably continue to fade the move to lower yields - for a few days at least. We also nibbled in the energy space which required some titanium testicles and gastro-intestinal fortitude. We did buy some BP - hated twice recently because of its twin currencies of sterling and oil - and we think the energy space could put in a decent run into the end of the year.

This is starting to look like a good environment for EMs, energy, REITs - falling dollar, relatively low inflation. The fate of the Santa Claus rally and any potential face-ripping in equities rests on the continuing trade war saber-rattling.

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Shameless
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December 8, 2018 at 1:04 AM × This comment has been removed by the author.
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Shameless
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December 8, 2018 at 1:27 AM ×

https://www.tradingview.com/chart/USDJPY/KkT8bEpv-YEN-on-a-knife-s-edge-Is-the-big-one-around-the-corner/

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IPA
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December 8, 2018 at 6:03 AM ×

Feels good to be right on something in this mess. Yet another lower low on XRT and it's threatening March low. Big names are continuing to guide down. Has anyone wondered how ULTA has kept up this long? Today we got the answer all at once, and what a double top on the chart now! LULU was a lemon today. I guess ladies are not that interested in tights and cosmetics going into Christmas. They are too busy playing Candy Crush on their phones - too many stores, too little time to shop. BIG is at a new 5-year low. If they can't move the crap off the shelves for Christmas, then who can?
The head and shoulders I mentioned in one of my earlier comments is in full play now. If 43 goes it's a quick trip down to 40 on XRT.

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Leftback
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December 9, 2018 at 6:21 PM ×

More of the same.... Choppy range trade until proved otherwise? Or behold the apocalypse? The jury is still out. Technical damage gets worse all the time, so any recovery rally would probably have to be a sharp one to repair technicals.

Energy, REITs and Emerging Markets - all of these still look like sectors likely to benefit from the recent move lower in rates and the dollar. The ugliness continues in "tech", "momo", "FANGMAN" - call it what you will, the excesses in positioning in these stocks among HFs are going to take a long time to work off, lasting well into 2019.

Does this mean that there is going to be a generalized "Big One" along the lines of 2008? Not until later - and not until we see real signs of panic in credit - and what we see is stress but no panic.

What we can see is this: Treasuries are very overbought. The enormous size of the short position has triggered a wave of short covering that resulted in a buying panic. We'd suggest this can be faded, and yields will back up a bit for a few weeks, especially as Brainard was out Friday with comments supporting continued rate hikes (really???).

Everything British is now becoming priced for what some see as a triple apocalypse: a hard Brexit, Corbyn and the collapse of the City of London as an international financial centre. The negativity regarding the larger institutions is probably overdone at the moment (perhaps until any one of these things actually happens). There is a lot of yield available in the FTSE if you pick your spots, and pricing for US investors has been lowered by weaker sterling. FTSE has become a bit of a yard sale.

France, on the other hand, is going to be a political and economic disaster for a few months and that has probably not yet been fully priced in. Germany also looks extremely unappetizing, at least until the future of DB has been resolved. [Hint: it is probably going to be an ugly taxpayer-assisted "merger" aka bailout.]

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Skr
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December 9, 2018 at 8:17 PM ×

Lefty - RE: Germany "merger aka bailout" one is reminded of - "When it comes to life's bitter pills, the hardest to swallow is a taste of your own medicine" not too many in Europe would feel sympathy, in fact many wish it was Germany leaving, not other members.
@France - "liberte egalite fraternite ou la mort. Has no place in finance until finance interfere's in its space. I wonder how many stardard deviations has America and France moved from the mean since their respective freedoms?
@Treasuries - the original MM seems to disagree with your thinking.
And finally for the batshit crazy end of year trade - long Spoo's, Oil, 10yr and DXY.

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cbus20122
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December 10, 2018 at 4:38 AM ×

@LB, and by "falling dollar", what you mean is that it's down to the "lows" of November 30th...?

I think if anything, it's been quite telling that the dollar pretty much hasn't fallen at all despite the assumed fed pause, drop in yields, and huge turmoil finally being seen in US markets. Many of the things that the dollar bears were calling out as the reason for a weaker dollar have happened, and yet nothing has really happened.

Given, I still think we may see one more dip in the dollar, but with the chaos in Europe, I'm not convinced it will be significant. If anything, I would say the Euro is not at all pricing in the weakness and political issues going on, and once that catches up with the rest of Europe, the dollar will rally as it's the inverse of the Euro basically.

Futures testing some interesting levels as Asian indexes open down quite a bit (as of 11pm eastern time USA). 2600 is looking like a very binary level to me, will either see a nice big bounce upward if we hit it, or we'll go down lower before seeing a recovery of any variety.

Of note - the global dow index broke below the post GFC trendline on today's negative open. This index was pretty reliable in calling the global market top in early February as markets imploded once the Dow Jones global index hit its upper long-term trendline.

I still feel like earnings will provide some support for US markets, but there is no doubt that we're getting slowing growth priced into stocks just like we did in early 2016, a time where we hit a very low GDP growth # before rebounding on the back of huge central bank stimulus that year. Lots of very ugly looking charts right now.

A lot of the value traditionalists who think things are getting cheap are going to be in for a big surprise in the coming quarters when earnings become increasingly worse (assuming no new enormous global stimulus). You get a great setup for value traps when companies start to see decreasing top-line growth as we're about to see.

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Nico
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December 10, 2018 at 6:24 PM ×

plenty of divergence everywhere - am covering post G20 short and flipping long for second Santa attempt of the year

LB are you watching Apple? someone came to buy em masse one hour ago perhaps tim Cook's personal buyback :D

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Leftback
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December 10, 2018 at 11:52 PM ×

Much wisdom above. This has been a very challenging couple of weeks. OK, here are the thoughts of LB, FWIW:

Shambles is a polite word for this shit-show in Westminster. On the other hand, between the currency effects and the angst about the UK economy, T-May's political future and the implosion of the City of London as a prominent financial center, and suddenly from the US perspective, British stocks are suddenly starting to look quite cheap. Of course they may get cheaper.

Other than BP I have never owned a single UK stock, but this week has me looking hard at Vodafone, Barclays and Lloyds as well as BP. It's a trifecta for me: 1. Yield (unless the world ends and UK banks go the way of DB), 2. a currency play as the dollar weakens against RoW (this is a given for me now - sooner or later), and 3. TWINE (world not ending after Brexit mess resolved, even if Corbyn is elected later on). Suffice to say it has taken this complete shit-show to make me look for the first time at my homeland as in any way investable. So I have nibbled on all of the above.

US markets looked suspiciously like a reversal today although we have had some fake outs before - not sure if that was the big capitulation event but it did smell like fear this morning. Market isn't going anywhere without AAPL, and the fruit duly obliged today with a bullish candle.

I am still banging away with my much-despised low rates portfolio (munis, Treasuries, REITs, and a bag full of divis), however today I sold Treasuries for the third day running, bought some EMs and energy - integrated oils, pipelines, but no E&Ps until the crude market stabilizes and effect of the OPEC cuts can be evaluated.

Rosie is on CNBC. I like Rosie but he is like Gary Shilling - when he's on TV that's usually a sign that Treasuries have formed a short-term top. I am thinking short TLT might be a decent swing trade now we are in extreme overbought territory.

It has been an almighty struggle this year but much has been learned along the way.

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Anonymous
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December 11, 2018 at 1:15 AM ×

Boys,

Having traded since Ye Olde Great Tequila of ‘94, my dos centavos is kiss 2019 goodbye. Picture a boot stamping on an interest rate...forever. Get as short as you can for as long as you can. This is the big one muchachos. 73-74 redux, at least.

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Nico
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December 11, 2018 at 7:15 AM ×

“Corporate indebtedness is now quite high and I think it’s a danger that if there’s something else that causes a downturn, that high levels of corporate leverage could prolong the downturn and lead to lots of bankruptcies in the non-financial corporate sector”

Janet Yellen

it is amazing how prescient (postscient, really) they are on a situation once they retire from creating the situation

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Anonymous
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December 11, 2018 at 5:45 PM ×

Off topic a little bit.

I remembered there used to be a tradition here to recommend some readings during summer and winter holidays. I wonder if anyone has such recommendations for this coming holiday season.

And I could not find a lot of old recommended books from previous posts. Anyone has those lists?

Thanks

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Leftback
admin
December 12, 2018 at 12:39 AM ×

We'll get to some reading material at some point, but right now there are a significant amount of punters still actively punting. The wise heads may prove to be those who packed it in at Thanksgiving - but we shall see.

Here's a comment/rant that is so long it's almost a post, entitled: "Buy British!"….

Britain… the Brexit farce continues. Sterling is sitting perilously with its feet dangling over a ledge, as MM pointed out today. With UK stocks now cheap and getting cheaper, one really has to ask, what else could go wrong? Let me put a contrarian spin on the potential fall of T-May. In view of the PM being the least competent since, maybe John Major, would a change of PM damage UK markets in any way relative to this week's and this month's confusion and uncertainty? I put it to the MM community that we are now in an ABT situation - "Anyone But Theresa" - and that sterling and UK stocks may be primed for a substantial rally once she goes. Yes, we may see a brief plunge in sterling to 1,22-1,23 but that may be very transient and should prove to be a tremendous entry point for investors.

At this point, markets would probably cheer anyone replacing May in number 10, whether there is a hard, soft or no Brexit at all. British people, business owners and foreign investors alike, we are all sick of the uncertainty. The Labour Party is going to avoid precipitating an election for now, because the Tories made this mess (Cameron vainly attempting to placate the back benchers with a referendum he thought he couldn't lose) and Labour wants absolutely no part of the responsibility for whatever May or her successor finally signs off on.

The banks are priced for Armageddon here, but the best of them have balance sheets that would easily survive a change of PM (yes, even Corbyn) and a mild UK recession. UK banks survived the GFC and Brexit is no GFC. There are many other UK yield vehicles trading at attractive prices here, take your pick depending on your outlook for commodities and interest rates. Telecoms, banks, pharma, energy - it's all on sale.

The way we think of Brexit is that it has made the UK behave a bit like an emerging market, except that there hasn't been a sovereign debt crisis and cable 1,20-1,25 is hardly a currency crisis. A very very bad economic event has been priced in, and it's not at all clear that it is going to happen any time soon, if at all. What foreign investors need to consider is that this transition phase could be far worse for the Euro than for sterling, and the UK may end up being a safe haven in some ways.

We are hardly jingoistic but Britain survived Napoleon and Hitler, surely we can survive Theresa May and Donald Tusk, granny is still going to natter on the phone and buy tea and ginger snaps at Sainsbury's, and nobody is going to turn the clock back to only buying butter from New Zealand. British people have already learned how to produce a lot of posh stuff that we used to get from "The Continent" and it's clear that This Too Shall Pass. We feel like putting out more flags at this difficult time...

US markets had a decent day today, which is to say they made it back to even after another news-induced morning and midday slump. Every day that passes without spoos and AAPL vomiting to new lows increases the chances of sellers packing up and going home for the year, thus ushering in the "Santa Claus rally". Emerging markets and energy are trading constructively for the time being, perhaps in response to what appears for now to be a tired USD. Treasuries didn't get much traction today in spite of all the global crises, US shutdown etc, which is kind of bearish in the short term.

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Nico
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December 12, 2018 at 9:55 AM ×

Europe is overperforming US for the first time in a long time. Dax found some footing after target was reached. Current PA Stoxx long will be sold today or tomorrow (time) if 3120 stoxx is reached and/or 2700 Spoos. Traders paradise. But one should not expect too much bounce from this broken market, Santa stuck in chimney style

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checkmate
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December 12, 2018 at 3:41 PM ×

Leftback,
I tend to agree with 90% of what you have written about the UK, Brexit and risk markets. The 10% we don't agree on is unfortunately enough to destroy any similarity in our conclusions. You see I don't think there is a price that can really 'price in' Corbyn in power. Indeed, I would say any rally in risk assets is likely to be reflective of a reduction in the probability that he may get into office. However, until such a possibility arises it is a pure gamble as to whether Uk risk is ridiculously cheap OR about to get much cheaper.

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checkmate
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December 12, 2018 at 3:45 PM ×

Just to reiterate what I have said before on this subject. In well over half a century I do not believe we have ever seen anything like Corbyn before in British politics. At any rate I certainly have not. We have seen some of his views ,but frankly they have never been held by anyone who had the remotest chance of exercising the power to make them happen and that is the difference today.

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Cbus20122
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December 12, 2018 at 8:59 PM ×

The last few days rally was one of the ugliest "rallies" i've seen in a long time. I'm going pretty heavy short here after today's failed rally. Nothing can catch a bid, liquidity sucks, etc. Today will close with some ugly looking candlestocks across a lot of indexes and a lot of ugly formations showing up. Not where I want to be.

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IPA
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December 13, 2018 at 5:16 PM ×

What? Stocks and bonds going down at the same time? How is that possible? You just wait for a little longer. This is the "new normal" still to sink in for some folks, including a few here. How about a prediction for a few to poke holes in? Both will be down from here by the end of Q1 2019.

Hey @Anon December 11, 2018 at 1:15 AM, put a moniker together and tell us more. We are open to your theory. Please expand and give us your thoughts. Fresh ideas welcome, even if they are over 40 yrs old!

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Cbus20122
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December 13, 2018 at 6:04 PM ×

@IPA, what duration are you talking? I wouldn't exactly call a 2 day bounce in yields after bonds being way overbought indicative of anything. The broad trend is still downward.

I get the rationale for bonds and stocks having a negative return, just don't see how it'll happen. If we get negative returns next year on stocks throughout the year, the fed will go more accomodative. That means either cutting rates or suspending the rolloff of QE. If we get positive returns on stocks (a scenario where I could see bonds providing negative returns), then your theory is already busted since we're assuming both go down at the same time. Even if that were the case, it would put us into a scenario similar to 2018 where the market going up just forces the fed to tighten more, causing yields to rise and squeezing the market such that inflation gets killed and stocks get killed.

I can definitely see bonds not being as strong as they were in past cycles, but I don't see any structural way both will be decidedly negative.

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nevnej
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December 13, 2018 at 6:59 PM ×

One scenario where both stocks and bonds drop would be if inflation creeps higher, even just a bit. Suppose one day we get a three month or six month stretch with an annualized rate pushing toward 4 or 5 percent. Even with a slow down, the Fed can drop short rates and it's generally "known" that slower/negative GDP growth would reduce inflation. A little move the other way could be a real shocker. So it's been "proven" now that in reality, negative real rates, zero rates, and printing money do NOT cause inflation, and economists have some explaining and hard thinking to do. Could be that velocity is just more endogenous than previously thought, so low rates do not necessarily create monetary expansion effects. But you have to believe in free lunches if it really is possible to print and spend without any repercussion. Maybe effects are small enough to be absorbed as they are spread out over many years. And maybe there are still a few chickens out there that have not yet come home to roost.

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Anonymous
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December 13, 2018 at 7:08 PM ×

@IPA et al,

How about 'moniker'?

"The big one", 73/74 Redux, and other bullshit?

Call it The Royal and Ancient Theory That Politics Drives Economics And Not the Other Way Round. (RATPDENTOWR)

Beauty and the Beast said it best:

Ten years we've been rusting, needing so much more than dusting, needing exercise, a chance to use our skils.
Most days we just lay around the castle. Flabby, fat and lazy you walked in and whoopsie daisy!

So, WTF, Get to it already.

Peak earnings, peak buybacks, peak passive, about to peak IG downgrades, about to peak deficits, peak transfer payments, peak gridlock, peak Trump, done peaked QE, peak globalist retrenchment, peak employment, peak tech unicorn/longer lasting lightbulb, peak central banker, peak Chiner, etc.

Soooooo, everything be peaking. In the midst of this peakery, the Trumpnado is about to be cornered by some equally nasty folks. Theresa May, Macron, Merkel, Xi (face saver) same, same, same.

You think Nixon nixed the gold standard in 1971 for purely economic reasons? Think again. Market smelled it in 1968. Didin't get nasty until Adjusted for inflation (key point) we didn't see that level again until.......wait for it.....wait for it.....1....9....9....2. Don't even ask about 1968-1992 bonds.

We're all macros here. Next to no one in the business today has ever really managed money in a ripping inflationary environment. And gentlemen, that is exactly what we are about to get. Why? Politics.

Governments throughout history that cannot repay their debts have two choices: default or inflation. They choose inflation every day of the week and twice on Sunday. You'll get your transfer payment COLI you dumb mthrfkr...in nominal dollars. Negative real rates forever.

The bond market kind of has a whiff of what's coming and that's why I believe rates aren't really budging with all the equity chop. It's the gut and the gut says run.

So (and I apologize for the bloviation) rates will stay low and inflation will run hot until the debt is manageable. I would bow to his highnessness the great and powerful Gundlach on this one: UBI is coming to the Western world. No more reserves, Maiden Lanes or Twists, just pure unadulterated cash on the barrelhead to keep the Reds at bay. Oh yes, it will be the Tories/Repubs/CDU that vote/sign it in. You heard it here first.

Again, what's my play for 2019? Long ultra and S-T IG fixed, muy healthy chunk of commodities (mostly softs), long very select megacap EM equity and a huge cash pile.

Let the politicians do what they do best, take care of themselves. Hunker and keep gimlet-eyed.

Much love,

Moniker

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Anonymous
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December 13, 2018 at 8:10 PM ×

That is the craziest thing I've heard all year.

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Cbus20122
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December 13, 2018 at 8:10 PM ×

You can't get inflation with the amount of outstanding debt we have. Apparently this very simple concept somehow is ignored by the inflationistas out there. It's very simple.

Loose monetary policy ----> Causes inflation

inflation ----> causes higher rates and fed hikes

Higher rates, higher inflation, tighter money ----> defaulting on debt from corporates, consumers, and other holders of USD denominated debts.

defaulting on debt -----> deflationary busts, leading back to square 1


The main issue here is that if you have more debt in the corporate/private sector, you simply can't get as far with inflation before something breaks and the economy starts having problems. If we had far less debt but the same deficits, we could push inflation very high since the inflationary issues wouldn't squeeze the debt markets like they are now. But that's not the case.

Since we're going back to a history lesson of the 70's, it's worth mentioning that the inflationary waves of that time were caused by a LOT more than just the deficits. The 70's inflationary waves were comprised by highly positive demographics (boomers starting families), very low private and corporate debt (which is the opposite of right now), and a series of supply constrictions (opec oil shock) that are extremely causal towards inflationary issues. The only item we have right now is our deficits, which will certainly be a component towards things, but the deficit alone won't be enough to offset the deflationary waves that are evident even right now around the world.

We will have an inflationary problem again at some point, but it can only come after we see a significiant decrease in the amount of debt outstanding.

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Anonymous
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December 13, 2018 at 9:42 PM ×

@Cbus et al,

Short-term deflation, Medium-term inflation.

Global Uncertainty. Peak Everthing. Too much debt to ever pay back.

Stocks fucked. Bonds fucked less and a bit later.

There. Much shorter and less bat-shit crazy.

Moniker

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Anonymous
admin
December 13, 2018 at 10:05 PM ×

This is crazy talk! Reminds me the inflationist during the QE years.

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nevnej
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December 13, 2018 at 10:29 PM ×

@everyone here -- thank you for your contributions to this forum, much appreciated!

@cbus
Thanks for your insights. I agree with the effects of the factors you mention for inflation, such as demographics and real economy forces. These factors may even be dominant determinants for relatively stable economies and be the likely drivers going forward. Debt defaults are deflationary twice over as asset prices drop in fire sales and also as money supply is reduced directly when money and wealth people counted on having simply evaporates.

But the measure of inflation over time is the value of a currency relative to goods and services. Increasing the supply of money should decrease its relative value, whether it is done through low rates (if not pushing on a string) or a helicopter drop. I still believe that ultimately, printing money affects general price levels, and in sufficiently large quantities will create and determine the general amount of inflation over time. Not regardless of the real economy factors, but overwhelming them.

Well, obviously I've been proven wrong on this for ten years now, and hey, look at Japan. WTF? It could be a matter of scale, transmission mechanisms, feedback loops, special conditions, I don't know. I just have a hard time with the idea that quadrupling the size of the central bank balance sheet is no big deal. I welcome feedback on how to change the theory to fit the facts. But certainly there are examples of countries where recession and drops in GDP and incomes occur in conjunction with continuing and worsening inflation in spite of high debts.

One way to square this circle might be to consider a debt default bust as effectively a massive shrinking of the money supply that offsets inflationary stimulus measures, and maybe this explains much of the past ten years. But that does not mean that any amount of deficit spending and/or printing is prevented from causing inflation because of high debt levels. And while a lot of debt may default, a lot is in the form of unfunded government liabilities that will be paid somehow, as Moniker points out above.

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Cbus20122
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December 13, 2018 at 11:58 PM ×

The QE's never caused the inflation people wanted in the real economy due to transmission. Most of the QE's just sat on bank's books as much needed liquidity. If we were to get real inflation, we would have needed that $ to reach the real economy, which never really happened since it would require banks to be willing to lend that money out. But that requires demand for those loans (which were in short supply post gfc) or for the banks to ignore risk in their lending.

We did get some asset price inflation, but once again, it takes quite some time for the effects of bonds getting inflated to transfer into real economy in any way (if at all).

The final thing not many people have thought about is that even if there was some real and noticeable inflation from QE, what's to say that the inflation provided by this didn't just prevent the GFC's deflationary wave from being way way larger? We will never really know the answer to this since we don't know what would have happened otherwise, but I would say we did get some modest inflation, it just served to combat the enormous deflationary effects in place.


But I do agree, inflation is a longer-term risk (3+ years), deflation is the near-term risk (1-3 years)

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IPA
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December 14, 2018 at 1:06 AM ×

@Moniker, lol, thank you for the second, shorter explanation of the above statement. We get it, well, at least some of us do...
So, what if there is no recession (or no perception of one anyway) and while the earnings may indeed peak, stock market participants still try to milk the cow that has not yet run dry and therefore equities go moderately lower but bonds actually go much lower? Just throwing my scenario out there.

Not to beat a dead horse... XRT down ~3% today at a new 52-week low and a bear market. BBY was shot to death today on above-avg vol. A fire sale is about to begin at a shopping mall near you - JCP is going to be the new SHLD and is now really scaring the crap out of KSS, JWN, DDS, and M. They decided to spare ROST and TJX today because when JCP is out of biz where will all of their crap end up at? Since we are on major retailers that may not make it - throw BBBY in there too. This shitshow may get a reprieve tomorrow if, and that's a big if, retail sales are better than expected. Give'em a few up days and they'll all be at yet new lows.

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Shameless
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December 14, 2018 at 7:05 AM ×

Likely direction of this market is _______ (fill in the blank depending on your bias). P/E's have re-rated, to growth. So what's holding up that fat bastard from rubbing a little crisco on his santa suit and sliding down the chimney already? Well....let's see, there are a host of issues (there always are). But I don't buy it. A trade war you say? Does it really matter to the grande scheme of things if el Trumpo raises tariffs to 25%? Sure its bad for growth and China will likely retaliate, but isn't it relatively quantifiable what the damage will be? You mean to tell me that global growth is so fragile that it cannot withstand a few bits trimmed off the top? Asking for a friend. No that's not it. But, the market's verdict seems hinged on the outcome as evidenced by its response to deal/no deal headlines. And I don't wish to downplay the other issues either like Brexit, Italy, Fed at this point other than to say they are risks which are largely known and largely in the price. (Britain will survive, Italy's Italy and the Fed will do its best to act in a manner which least surprises market expectations). Even if they did want to keep the music playing for one more song, what's the best they could reasonably do at the moment - how bout no hike and cessation of QT? What would that realistically do to markets other than squeeze out weak shorts? What if we got a trade resolution, like tomorrow? I mean sure, I'd buy into a rally but for how long would it take until the market shifted its focus to the next crisis du joir. It's just begging for a new headline to give the algos some fodder to chomp on. Realistically, the cycle has turned, the music is fading and its only a matter of time until we get a trigger. Maybe we've even already had one and will only realize it with hindsight. Anyway it doesn't seem like there is much appetite for risk these days. Here's to hoping the New Year brings new views and new ranges to trade. Happy holidays all.

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checkmate
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December 14, 2018 at 8:46 AM ×

"Britain will survive" To make a point I would suggest making it relevant. Will Britain survive isn't relevant. The question is if Corbyn is elected and you are holding equities in any one of the Industries he has suggested will be renationalised then what is the price you are willing to pay right now when his plan is to pay you for your assets by issuing long dated bonds paying peanuts. Now that's relevant, because what is the price reduction demanded if your projected divi yield of 5 or 6%pa is reduced to 1% with no growth benefits ever attached? I'll summarise it for you, it's uninvestable.

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Shameless
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December 14, 2018 at 12:23 PM ×

And thats why i don't invest there. Who does anyway? Oh, right. Although once betty gets down to around 1,20 or so I might have a punt or two. I care very little what happens in the UK other than the quality of players in the footy matches might decline drastically. This of course would be bad for viewership, but probably good for the national team as it would increase domestic competition and possibly lead to improve performances on a national level. But I digress...might I suggest to you sir returning to your world renown British sensibilities by keeping calm and carrying on? If not, we can certainly make room for you over here in Trump's America where there is plenty of hysterics going on already.

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Cbus20122
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December 14, 2018 at 2:24 PM ×

Well would you look at that... Bond yields down, markets down, dollar up .61% already as it re-approaches the neckline of the 1-year inverse head and shoulders (which has been tested a few times already). Regardless of the fact that american equities are not performing well, currency is always a relative game, and the fact is that the rest of the world is still in a worse position than the US economy. Europe is on the brink of recession right now if you look at the economic data, and Draghi is now tightening into a slowdown. China is putting up numbers that are the worst it's seen in over 15 years (if you can trust the data there...).

Dollar is going higher, and this is a feedback loop that has already been slowly unwinding over the past 5 years, and is now picking up steam. Commitment of traders is somewhat irrelevant here in my opinion.

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Leftback
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December 14, 2018 at 6:29 PM ×

Tons of respect for all posters here… seriously. The problem with comparing our views is always timing and time horizon. I am trying to put my book together for Q1 '19, and not looking much longer than that just now.

Still like Britain for a punt. One Corbyn doesn't make a communist Labour government, and the Tories are still in power for now. So that's not a factor at the moment, in our view. The fact is, and we have a fairly long UK political memory, there are always moderates in the Labour party and they are usually close to the Exchequer. The party as a whole isn't radical enough to nationalize much more than the railways and a few other things that the private sector has actually made a dog's dinner of. This is a Red Scare in my view. The Sterling bears continue to pound the table, but there are no immediate negatives regarding Treezer that we don't already know.

Very interested in dollar and oil discussions at the moment. They are key to the rest of the puzzle. We are wondering whether there will be discussions of the rate of QT as a monetary tool. The FOMC has underestimated the importance of the balance sheet in monetary policy while most have focused on rate hike projections. There is scope for a dovish switch along with the hike, that would send the dollar lower, EMs and commodities higher, sterling and UK banks and energy will also benefit.

Everyone is bearish. You know what that means, short-term?

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checkmate
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December 14, 2018 at 9:28 PM ×

LB,

You are thinking about a labour party that you recognise. This one is not that. In fact it is unlike any labour party seen since the 1920,s. Moreover, it is not just Corbyn who is the extremist, far from it. I get the sense you have not been following the political changes that closely otherwise I don't think you would have reached these conclusions. Trust me,I don't scare easily, but the prospect of a Corbyn l e d labour party is terrifying. Think Venezuela albeit in a diluted form. Your money,your risk,but at least do it with a reasonable idea of the risk faced.

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Leftback
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December 15, 2018 at 3:17 AM ×

@Checkmate: Thanks for the commentary on "New New Labour", as it were. We are definitely going to be reviewing this as time progresses, but the point we are trying to make is that "regime change" of that nature in Westminster remains remote for the immediate future, unless the Tories make the mistake of calling an election, which we think they avoid doing at all costs. Look for all manner of horse trading to occur on the back benches in order to allow T May to complete her mission with regard to Brexit and then do her own Trexit to usher in a new PM without going to the electorate.

I do remember the slim prospects of a Foot and Kinnock government, which sometimes seemed to espouse policy positions to the left of the Kremlin of the time. These proved unelectable, although Kinnock in particular had many redeeming features. We shall see what transpires with the current version, and also whether Tory incompetence persists long enough for them to lose an election, presumably with a brand new leader at the helm. Incidentally, Rees-Mogg is right out of nasty Conservative central casting (did anyone see his comments about Carney?), so it seems that the machine that gave us Heath, Tebbitt and Hague among others is still alive and kicking.

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Leftback
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December 15, 2018 at 3:25 AM ×

Very very bearish… it's remarkable how sentiment and news flow have shifted since September.

There are a few things that should be discussed. A mini-post:

Deep Thoughts on the Fed Balance Sheet.

One. Several cerebral commentators (Jeff Gundlach, Anthony Sanders, Lance Roberts) have raised the issue that the QT, or balance sheet reduction, is having a more powerful effect in terms of monetary tightening than the modest pace of rate hikes. I saw Ben Bernanke in the airport this week and I wanted to engage him on this topic, knowing that he would reflect that when using extraordinary measures and unconventional monetary tools, we are indeed in unexplored territory. No central bank has yet undertaken a successful reversal of QE, and Japan had to reverse course and go QQE. I am raising the possibility here that changes in the rate of runoff are a part of what was envisaged as Bernanke's extraordinary tool box, and that a potential slowing of QT might become a part of the press conference conversation and even appear in the FOMC statement at some point.

Two. Kashkari is not a voting member at the moment, but remains one of the most intellectually able Fed heads. He stated some time ago that the Fed should slow down the pace of rate hikes or simply stop. It is likely that other Fed heads will have joined him in this view, Bullard, for example. Kashkari's familiarity with the genesis of the GFC and the inception of TARP etc.. probably gives him a more sophisticated insight into the importance of the balance sheet (the flow of Treasuries influences interest rates and the flow of MBS influences the mortgage and housing market). His views will eventually hold sway over others. Brainard is also intellectually capable but seems to be stuck in an ideological rut currently in continuing to propose rate hikes. Other current voting members are, shall we say, more herd-like in their thinking and are less likely to influence policy. Other commentators, such as Mr Cramer have been less polite regarding Fed intellectual abilities. There are clearly some less than stellar intellects on the current FOMC (one of the least able voting member rosters in recent years), which is unfortunate, and might be very damaging.

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Leftback
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December 15, 2018 at 3:25 AM ×


Three. Let us propose that the December hike is the last one for some considerable time. Let us also assume that there is a slowing of the US economy to stall speed. The Fed is unlikely to cut, as doing so might precipitate market panic. The usual pattern is they wait too long and then a full blown recession will have begun before they lower rates. If rates are flat in 2019, then FOMC press conferences are going to become important, as with the ECB, and this will be especially true if there is a stall in rate hikes. At this point nothing will be happening on the headline level, but the balance sheet run-off RATE will be key. The balance sheet is going to become the pre-eminent tool in 2019, and even a modest slowing of the balance sheet decline, say from $60B to $40B/month will be viewed as monetary easing that might prevent a meltdown of credit and the leveraged loan market that seems to be a threat at the moment.

Four. It is possible that the Fed makes a serious policy error, continues with 3 or 4 hikes in 2019, along with $60B/month asset sales. A global recession would quickly follow. Let us assume that sanity prevails, and the Fed remains flat in 2019, there is a possibility that the current market turbulence does not lead to an impending inevitable BIG ONE, and that the early part of 2019 plays out a bit like 2008, with some volatility but that the Q4 earnings are not a disaster and the markets stabilize for several months.

Five. We point out the curious case of the dog in the night time. Jeff Gundlach has noted that the recent rally in Treasuries has been muted at the long end on the big risk off days. The bond market may be sniffing out an outcome that is less deflationary than what a policy error would lead to. The VIX is also anemic considering the market's real time gyrations and realized volatility. We therefore suggest that Treasuries and volatility might be a sell here and are forecasting calmer conditions ahead. Our understanding is that this represents a contrarian view at this time.

Have a peaceful weekend, all.

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checkmate
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December 15, 2018 at 8:43 AM ×

LB,
OK, Now I know you are missing the detail. First, let me say the risk here is nothing to do with the 'Torys' calling an election' and that is why your conclusion as to a 'remote' risk is way off. The risk here actually is that the Torys govern with a minority govt that exists only because the DUP agree that it does so. Corbyn understand that he can already count on the support of everyone other than the Torys and perhaps the DUP. This means he can call for another vote of no confidence, this time in the govt not simply Theresa may it's leader. To win that vote and put the Torys out of power he simply needs the DUP to remove it's support for the gov. They don't need to vote against the govt just abstain. Likewise if any of the 117 Tory MP's who voted against May and lost do decide to vote with No Confidence vote then again Corbyn wins and the Torys are out. Crucially Mays' Brexit deal and indeed May herself have already lost support from the DUP who as a show of intent voted against her recent financial bill. IF they take that one step further and don't support the govt as a means of getting rid of both May and her deal then it is game over for the govt. Now if from this summary you think it is clear that the risk of am election and Corbyn govt is remote then to misquote Greenspan 'you must not have been listening'.For clarity the way this works was last expressed in 1979 when the minority labour govt led by Jim Callaghan was tossed out of office by a vote of no confidence. Ok, that's it, you're now on your own. The info is there so it's up to you what you do or don't do with it.

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checkmate
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December 15, 2018 at 9:27 AM ×

RE your Vix etc comments I would say the Bullish % Index could be supporting that view in that this Xmas run in looks like a higher low fornmation to run into the New Year so a general lowering of volatility and closing down of some of those trades that have been running in preparation for the thinner holiday season.

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Anonymous
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December 15, 2018 at 11:51 AM ×

Two scenarios here:

One, the US market makes its way to 2350-2500 probably this week at which point with Fed easing the USD starts to weaken and US stocks are saved from the big one as positive currency effects support eps expectations for 19. The US stalls but does not enter recession. Fed easing, trade war non-escalation, and strong employment/wages + fiscal stimulus in Europe help fuel a bounce in Europe in q1-q2 19, and Europe significantly outperforms US stocks in 19 (starting from much lower base, been in a bear market for most of 18, never really had a speculative boom). China keeps its shit together, which given that industrial commods have held up well vs 14-16 suggests they are not particularly trying to curtail their excessive FA investment. EM outperforms too. US stocks are not a buy because rates head higher globally.

Second, the USD strengthens and the US and ROW slow more aggressively. US re-finds the definition of cheapness and heads to 1550-1800 over the next 6 months. Europe trades poorly as ECB forced to take some kind of action, and slowdown butchers Italy, and China drops the boom, killing off miners and capital equipment. EM is skewered by the break out dollar and china.

Now of these two, the first seems much more likely to me as the main excesses of this cycle have been US FANG valuations over the last year, and not some massive developed or em credit boom (apart from china). Rates are low in aggregate and supportive of growth. Developed market banking systems are the healthiest in years. A lot of EM has been put through the fire over the last few years so should be more robust. Now what actually happens is anyone's guess.

On Corbyn - I don't think he gets in, and if the Tory government falls from the DUP (v unlikely given they HATE Corbyn & McDonnell for obvious reasons) then any labour government would find it difficult to do anything significant given their number of mps and high number of rebels. The greater risk would be an election but that is going to be avoided for as long as possible. If Torys lost a confidence vote, May would quit, and the DUP would support most of the likely Tory successors.

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Anonymous
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December 16, 2018 at 1:09 AM ×

@Anon,

Interesting binary for 2019. Couple of things, though;

Banks today are not healthy. This is because reserves don’t equal health only profits do. Really good work on this topic done by Chris Whalen lately. GSIB are literally being destroyed this year and I believe someone’s about to fail, cough, DB, cough. Or, a major industrial is going to roll over hard. That sort of headline smack is one of the few things that would take us to 1500 as quick as you say.

EM has been singed but not fired. Catch that knife at your own risk. Down 50%+ before I touch it. Only Turkey could be conceivable bought but even it has too much political risk for this chicken.

Per Druckenmiller: figure out where liquidity lives and work from there.

Moniker

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Nico
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December 16, 2018 at 11:02 AM ×

shameless and all

it is eerie how peeps are (still !) looking for the ONE catalyst / a 2008 Lehman or a 2001 Forbes cover when it is a full Adams family of catalysts that have stricken this year:

- peak hubris Davos - "you're gonna feel stupid if you sit on cash" . !!!!!
- Europe not confirming new US high post summer, precisely like 2007
- peak euphoria parabolique à la 2000 with AMZN doubling this year and shit like that => the break in FAANG was your Morticia

- peak summer euphoria on small caps - Russell 2000 leading (hard) the decline ever since

- Italy blowing over 1.8% budget deficit used to be feared as THE catalyst for a global bear market. When 2.4% (!!!!!!) happened, people shut up, but Italy(an banks) still went to the gutter and look at Europe now, French gilets jaunes will bring the same (new order) extreme left-extreme right coalition at next elections as the one governing Italy today. And elections could happen much sooner than 2022, mind you

MFGA MIGA MHGA MBGA etc

- the Gomez Adams of catalysts is CREDIT. After formidable complacency credit spreads are starting to reprice everywhere. Not an 'accident' but the result of malinvestment and buybacks gorgeing on cheap debt to buy overvalued shares => balance sheets get disfigured. General Electrics will be remembered as the biggest scandal in wealth extraction/strategic suicide in the history of US capitalism. Jack Welch can go dry-ash fuck himself

- LEVERAGE LOANS - look no further - the trillions of closet skeletons are gonna hit US banks so hard 2008 will look like the fairytale when Buffet could come and convertible bond Goldman on its knees

Brexit, trade wars are just ongoing cancers and no catalysts per se. A cold war with China was decided during Trump campaign (!!!!) never heeded, markets only priced tax cut blindly to the sky and will now reprice to about 2100 /Spoos

If anything, remember one thing: the trade war is just an excuse. A COLD war is actually happening between the world's two hegemonies. One that works 8am to midnight 6 days a week, and the other gun-crazed, hooked on opioids and legalising marijuana all around

who wins?

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Anonymous
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December 16, 2018 at 12:53 PM ×




"If anything, remember one thing: the trade war is just an excuse. A COLD war is actually happening between the world's two hegemonies. One that works 8am to midnight 6 days a week, and the other gun-crazed, hooked on opioids and legalising marijuana all around

who wins? "


Nice Nico.

The one that understands that social media (instagram...) is the outlet of the bipolar league. Anyone that doesn't do their own research before investing time and energy (wall street, I'm not getting out of bed for your polo circuit elite...) into future investments needs to understand fake news/markets are embellished by the ease of the synapses reception to social media. You don't have to earn the skill to do most things today..eg, check out a hot sort in her bathroom attire ..or not. Simulate yourself in another country trying out some wild sport etc etc...

Merry Christmas all...see ya on that beach...yeah yeah yeah...up or down the coast...does it really matter.

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Skr
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December 16, 2018 at 2:25 PM ×

An honest economist , a kind hedge fund manager and Santa Claus were walking down the street and saw a $20 bill. Which one picked it up??

Santa - the other two don't exist.

Have a good one, may your God be with you.

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IPA
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December 16, 2018 at 4:32 PM ×

Everyone is so bearish on everything here it's a bit scary to be in the company. I'm also bearish on some sectors but I'm not a bear on everything. It's not as bad, guys. US economy is not falling off the cliff and while consumers are maxed on debt they still have jobs. While some sectors are clearly going to hurt because of their inability to adjust to new trends, others are still going to do well enough to keep US from falling into recession and perhaps even surprise with higher than expected growth. All this crazy talk about 2008 or something bigger on the horizon may still happen but not in 2019, I think. I don't have to tell you how myopic the market has become, so don't even hope anything gets priced in further out. Equity index bears are just one piece of good news away from being fried. It makes sense to address each sector individually vs the broad-brush index approach from here on, imho. As US equity indices bounce US Treasures' safety is simply going to be less needed. Add a positive surprise or two on major economic releases and weak bond longs will run for the exits en masse. We will see some big moves down on bonds in January as a bear market in bonds continues, I think.

Good holidays to everyone! Don't forget to thank your loved ones for putting up with you.

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Shameless
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December 16, 2018 at 4:38 PM ×

Amps and Santa walk into a bar? Which one is real?

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Nico
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December 16, 2018 at 10:00 PM ×

"US economy is not falling off the cliff and while consumers are maxed on debt they still have jobs"

you said it yourself IPA. Consumers are maxed out on debt. I mean, please elaborate on how long you would expect current stretched credit cycle to continue before crashing? Cycles are.... cycles.

am gonna repeat leverage loans leverage loans leverage loans until everyone understands where the hurt is going to come from. I have been through 3 bubble bursts already but still willing to think that others have much more experience, and better understanding of things so please IPA one more time, explain how they can maintain this credit bubble with QT at full speed

until you prove the same understanding of credit cycles as Ray Dalio, i am leaning on his side: les carottes sont cuites. THank you for putting up with me.

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HURDY
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December 17, 2018 at 3:06 AM ×

Do new volatility regimes imply that previous events like a gov shutdown need more attention?

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Anonymous
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December 17, 2018 at 3:29 AM ×

"Amps and Santa walk into a bar? Which one is real?"

Shameless...

Amps won't be walking into any bar with the wall street Santa in any lifetime we know of. Amps has been a very bad boy. He has left the wall street Santa the bagman holding all his little goodies that he hands out, that he has to finish Amps off so as jettison father Christmas's slay of impediments towards the charade of respectability needed to keep the children's slay going.

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Anonymous
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December 17, 2018 at 4:41 AM ×


Merry Christmas all...and a special one to you wall street Santa for this Christmas. You'll need it...as I know ((they)) have all given you the responsibility to put that bad man amps away for good. Your going to need to grow a set of balls to that...only if you knew how!

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Anonymous
admin
December 17, 2018 at 4:47 AM ×


Merry Christmas to American Gangster...rusty crowe. Merry Christmas...gangster!

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IPA
admin
December 17, 2018 at 5:51 AM ×

@Nico, I'm in full understanding of cycles and a student of several myself, While consumers are getting stretched on credit (up $25B in Oct alone) they are not dead, have jobs, need to maintain their lives and are spending quite strongly (discretionary spending at 7-mo high in Oct). Housing taking a hit here on higher rates will shave some pct pts from GDP, but the rest of the economy is not going to stop growing or collapse because the plastic is getting maxed - consumer confidence has not tanked, and wealth affect has not been hurt by the stock market selloff yet. I get your leveraged loans argument. I'm actually moderately bearish on stocks going into the end of Q1 2019 but for different reasons and not until after the January rally fries some US equity index bears, then stalls, and Feb - Mar decline ensues, albeit from higher levels than here. But I'm not thinking about a huge broad decline like some here, too early for that batshit stuff, so I'm selectively short retail, reits, and homebuilders (which is well-documented on this thread).. Bonds are a different story, as the economy starts to show it's not cratering and is growing well, data-dependent Fed may go back to thinking it needs to raise rates (like originally predicted for 2019) and that's where the big decline starts. Equities would follow as the worry about Fed hawks comes back. Strong econodata in Jan is the key to my outlook.

Not sure how to comment on your Dalio remarks but extremely flattered by comparison :)

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forgot2hedge
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December 17, 2018 at 4:28 PM ×

@Nico - would love your views on the China vs. US hegemony issue as I am struggling to wrap my head around it.

No doubt China works harder ("works 8am to midgnight 6 days a week") and that should translate into growth ('GDP'). China is working on de-dollarization (oil exchanges, Russia, RMB/Gold in exchange for trading partner resources), unfettered AI ( unlike US with social/political/moral/public hurdles), weakening post-WWII/US/Western European institutions (IMF, WTO, etc... ) by creating their own proxies. Despite this, I think the rest of the world cares about things like property rights, rule of law, and due process, and thus, are willing to underwrite US budget deficit/govt debt.

Given the debt/credit imbalance in China PPC's control/plate spinning can't continue indefinitely, especially as they increasingly seek to tap capital from abroad. How do you reconcile their domestic imbalances, domestic malinvestment, challenge of maintaining social stability, and their growing need to tap outside capital while at the same time competing with the US? What real money manager would want to hitch their assets denominated in RMB versus the $?



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forgot2hedge
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December 17, 2018 at 4:35 PM ×

* CCP, not "PPC"

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Nico
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December 17, 2018 at 5:43 PM ×

forgot2hedge

China is creating their own proxies in everything including attracting foreign students to their prestigious universities - a highway to image and loyalty building, and brainwashing

more and more students are flocking to China to study (mostly from African and south American countries where China 'stealth- invests massively) and there is a substantial feel of cold war into that - attracting students that are sympathetic to China or rather to anti-American views

I believe Chinese people are smarter than us. You saw that guy juggling with three Rubik's cubes? kidding, their POLITICIANS are all fucking geniuses vs. our Palin and Obama and Ocasio and Trumps of all shades. And yes they work twice more.

i mentioned foreign students because if Chinese in house intellectual superiority was not already enough, snatching top talents abroad from the US, all the Sergeys Brins of the 2030s, will deplete America by the same measure. It would be interesting to measure US GBP and market cap net of its naturalised talents, because if you had to measure the intellectual mass of both American de souche and Chinese populations you would know that China has already won

conclusion: the 1990/2000s were probably peak-democracy peak peace in the world and we are heading towards nastier populist and protectionist times

if you excuse me i have a Santa long on eurostoxx to 'curate'. It's shit.

zaijian !

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Cbus20122
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December 17, 2018 at 8:14 PM ×

So I wasn't super super worried about leveraged loans / junk previously, but I'm starting to get a lot more nervous about this area sooner than I had thought.

Did anybody pick up the huge moves in the BDC sector today? Down almost 5% on almost zero news, including well-managed names like Main Street Capital.

Look at the BDC sector. Then look at $BKLN or any leveraged loan etf... the outflows are rather stunning, and there is no underlying liquidity here.... Then look at the etf $FLOT as well, which once again has similar issues.

Additionally, while I'm just a retail trader, I've read quite a bit of commentary on how there is absolute zero liquidity right now in corporate bonds.

I know this area has been mentioned a decent bit by the media, but the fact that it's been discussed more by the fed and people "in the know" as a real risk tells me that main street does not really understand the risk here. And beyond that, the price action going on above has me a bit worried about some undercurrents here. In other words, I don't think risk here has been fully priced in at all, and more than that, the fact that there is some intense liquidity risk here is frightening. Liquidity risk in the bond market is precisely how 2008 occurred. I'm far from an expert here, but a few downgrades (which is inevitable from GE bonds) could trigger some intense problems I think in markets domestically.

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Anonymous
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December 17, 2018 at 9:13 PM ×

@Cbus,

You mean lev loans/corporate bonds aren’t as liquid as the ETFs in which they reside!? What?! And, and that making a market in corporates is for suckers?! What?! And, and that Cov Lite should only be used with hookers?! What?!

Welcome, my friend, to Thunderdome! Where your host, Pari Passu, is about to teach some 12yo PE/HFM a lesson in pain.

When the bid goes to zero: part 1

Moniker

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Cbus20122
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December 17, 2018 at 9:33 PM ×

@IPA, I will add, I do see one scenario where your idea of bonds down, stock markets down thesis could be the right call. That involved China being forced to sell their UST holdings (long term treasuries) for the purpose of stabilizing the Yuan so it does not break the magic line of 7.

I tend to think this is part of why the moves in the long end of treasuries have been somewhat muted recently, and why the short end is rallying faster contrary to what is "normally" expected under these market circumstances. Just got confirmation today that china has been a net seller of US treasuries once again.

Interestingly, this idea is bullish for the dollar in the long run as it would keep up yield differentials, which would apply further pressure to the Yuan despite the selling.

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Anonymous
admin
December 17, 2018 at 11:22 PM ×

All this scare mongering about corporate credit. Its NEVER been liquid when you need a bid, 100.25-100.5 100 up, 48-52 1x1, nothing new there. Now the scare stories are just that. Credit seems mostly quite well behaved (HYG JNK very tame) and it would be quite surprising if it did not widen more just to catch up, but there are not the same problems that caused credit crises of old namely, illiquid assets held in leveraged structures that needed a bid today, or a massive credit fueled boom in a particular industry built on HY debt.

The bubble this time has been in US stock market valuations on inflated earnings (or even no earnings), and the question is whether this gets resolved now or later. The rest of the world seems pretty cheap by comparison, and a weaker USD would do a lot of wonders for getting that going.

So I guess the FED will be pretty significant. If Hawkish, the USD breaks out and this gets a lot uglier. If dovish enough, I expect stability and growing optimism will lead to re-steepening the yield curve and the next leg lower in bond prices. I can see this cycle lasting longer, and the US stock market being tortured for some time. Everyone hates Europe right now, and I cant stand the collective pessimism in the face of strong real wage growth, low unemployment, end of qe, fiscal stimulus. Somehow deficit spending is "bad populism" when its Europe and fiscal stimulus when its America. BS.

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Turtle
admin
December 17, 2018 at 11:47 PM ×

Its always weird to see how the Chinese see ourselves vs how foreigners see us. Its always such a contrast.

Dont want to hijack as this is a market forum - but citizens of a "major power" trust in their systems/social institutions. Otherwise there is no robustness against stress.

China has little trust. Mainlanders do not trust something as basic as their own food supply lines. Cue the infamous scenes of Chinese buying milk powder in bulk in Australia. Funnily enough it also happened in HK - 1 country 2 systems did work in a way I guess.

This is driving the social credit system btw - trying to social engineer away the tendency of mainlanders to screw each other. Its kinda working btw - my relatives on the mainland just have to mention "the black list" and debtors go pale and scramble to repay.

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Cbus20122
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December 19, 2018 at 5:51 PM ×

So one thing I've been tracking purely on a chart basis all year (even before the drop in oil) is the multitude of very long term H&S formations in the energy sector and inflation-linked commodities sectors. These can be seen almost everywhere, it's actually rather stunning. Just recently, we got a lot of neckline touches (or even small breaks in some instances). I think we get a small rally here to complete head and shoulders in some instances (Crude futures for example) before we fully break down.

Additionally, as I mentioned, we have gold tracking back up to the neckline it broke in mid July, copper touching down on a smaller H&S, Silver lagging but trying to catch back up to the neckline it broke around the same time as gold, etc etc.

So I'm going to make a call here for fun.

I think we get our rally from here on a fed pause, which causes the dollar to drop a little bit (for a month or so) and commodities to rally a little. But I think reality sets in within a month, and we'll get these items collectively breaking a lot of head and shoulders along with the dollar breaking its own inverse h&s formation finally. This coincides with strongly dropping inflationary data, and will cause the fed to have to lower rates, possibly as soon as the January FOMC meeting.

I still think long-dated far OTM puts on gold indexes could be one of the best risk/reward trades out there from a tail risk perspective. This option would not only cover a lot of standard deflationary events for the next 2ish years, it also gives immense potential reward in the event of a Chinese hard landing or a eurozone currency crisis (both would be dollar positive). Given, further waves of stimulus would potentially cancel this out, but if you're doing this far enough OTM, you're not risking all that much.

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Leftback
admin
December 19, 2018 at 5:55 PM ×

FOMC prediction time

Rate hike - yes
Change of language from "guidance" to "data dependent" -yes
Pace of future rate hikes may be "slower than anticipated" - yes
Mention of "headwinds" or even "liquidity concerns" - possible
A range of policy options may be considered (including rate of balance sheet run off) - possible.

Results -

dollar - sell the news: knee jerk higher, then lower.
Bonds - Sell The News: spike to lower yields, then reversal.
equities - knee jerk lower, then higher.
commodities - knee jerk lower, then higher.
EMs - knee jerk lower then higher.
vol - sell

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Anonymous
admin
December 19, 2018 at 7:42 PM ×

The Fed just announced that they will be the ones to start the recession. Perversely, any recession may be over by early 2020. Reagan 84 anyone?

Moniker

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Leftback
admin
December 19, 2018 at 7:46 PM ×

Powell's answer to the balance sheet question proves that he is one of the lower powered intellects on the FOMC. He was offered an additional exit door, marked "Soft Landing", and chose to go through the door marked "Potential Liquidity Crisis". Moron.

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Leftback
admin
December 19, 2018 at 7:54 PM ×

McKee is giving him a second chance to discuss balance sheet runoff. He booted it again….. idiot.

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Leftback
admin
December 19, 2018 at 7:55 PM ×

Loved the question from Jeanna Smialek about why the f*** they would even think about rate hikes with plummeting inflation data….

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Anonymous
admin
December 19, 2018 at 8:15 PM ×

China - Russia vs the West

Fear vs OPEN society. Who do you think fuels the INNOVATION?

China is good at Copying and stealing. East German and Russians were good at everything Once upon a time

How Chinese hacking felled Canadian telecommunication giant Nortel

Long before the US charged five Chinese military officials with committing hacking offences and economic espionage against major US corporations, executives and entrepreneurs say they knew something was amiss.

https://www.afr.com/technology/web/security/how-chinese-hacking-felled-telecommunication-giant-nortel-20140526-iux6a

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Anonymous
admin
December 19, 2018 at 8:24 PM ×

How Huawei’s Rise Coincided With Telecom Giant Nortel’s Demise
Intelligence experts sound alarm about Huawei's involvement in Canada's 5G network

https://www.theepochtimes.com/how-huaweis-rise-coincided-with-telecom-giant-nortels-demise_2732995.html

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Leftback
admin
December 19, 2018 at 8:31 PM ×

Powell may be a candidate for the Trichet Memorial Prize for insane macroeconomics, by tightening into a recession (at least this will be the result if the deflationary impulse from commodities holds sway).

Alternatively perhaps Powell is auditioning for the manager's position at Manchester United. The suicidally nonsensical strategy outlined today would certainly be a good fit for that job.

He really doesn't understand the balance sheet, he just doesn't f**king get it, or understand the connection between the last crisis and the next. The housing bust didn't go away, it was just papered over, and he might be on the cusp of reviving the one catalyst for the next crisis that we thought was not going to be in play because the Fed had too much good sense.

Look at the faces in the presser. The economics correspondents are stunned. It is beyond their understanding that the FOMC doesn't appreciate the effects of the balance sheet reduction on market liquidity.

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Nico
admin
December 19, 2018 at 9:11 PM ×

wow, an 'independent' Fed that no longer seems to be 'only working for the 1% to get richer' is pissing a lot of people off, i see

they should have started balance sheet reduction in 2013, they are only 3 years late,
the spoos should have peaked at 2100, and they traded 840 points too high /with a significant portion explained by fang mania

mispricing of risk/malinvestment/cov light, leevrage loans fang bubble and buy back mania - you really expected the Fed to continue favoring such excess?

i don't get your tantrum

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Leftback
admin
December 19, 2018 at 9:25 PM ×

Shades of 1937. Look, I am sorry, but this is a very serious problem. Did you see the credit markets this afternoon?

Powell is a f**king idiot. It's hard to tell whether he didn't understand the question about the balance sheet or whether he really believes the answer he gave about its lack of effect on markets and liquidity.

Look at break-evens, 30y break-evens are <2.00%. Deflationary warnings are EVERYWHERE and the FOMC is tightening like old times, as though we have 6% GDP and 5% CPI. What is the purpose of this? They should just stop pretending that they know what they are doing - just f**king sit tight and let the economy find its own level for a while.

The FOMC are like airline pilots navigating by looking out the rear of the plane. All of their employment and inflation inputs are stale data, and we all know that there is a big deflation pulse already ingested and traveling down the python. The plane is about to slow to stall speed with the nose down and they are turning off the engines.

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Anonymous
admin
December 19, 2018 at 9:40 PM ×

Nico is bang on. The market is a massive drama queen about QT and rates here, the issue is how high we went first.

I gave two scenarios. We are edging towards the more pessimistic one, but until we see a sharp USD appreciation I think the jury is still out. We are going to go 2350 in short order, 2100-2200 probably. Watch the USD and ROW.

Liquidity conditions are not that bad. We need a cleansing plunge in USD assets. The macro isn't bad enough for this to be a 50-60pct bear market. Its going to be 20-30% my base case. Europe/UK is interesting. Will probably be down 20-30 from high in next few days. Valuations much lower. Italy is italy and isn't blowing up (this year).

I think you buy the mess of the next week or two, and look for Q1 recovery. Not sure if u buy US assets will be touchable though. They have been tripping for years.

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Anonymous
admin
December 19, 2018 at 9:45 PM ×

And btw all this deflation inflation stuff is nonsense.

Rates just need to be normal. High rates don't necessarily cause deflation nor low rates cause inflation. Sometimes they do, sometimes they do the opposite. Right now the fed is fine to ignore the drama

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Cbus20122
admin
December 19, 2018 at 10:02 PM ×

The bigger issue that isn't yet being discussed in here is that regardless of domestic markets' reaction to this, this is going to put even more pressure on emerging markets and China, all while being very dollar positive.

I actually think we very well may rebound in the USA from a market perspective for a bit, but I'm not convinced things will go so well outside our borders as US tightening tends to tighten financial conditions even more abroad than at home.

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Shameless
admin
December 19, 2018 at 11:45 PM ×

Well that wasn't so bad.. I mean considering consensus was for a minimum of a dovish hike and other well educated participants were even thinking we could get some tweaking of QT, the only real surprise was that the market held up as well as it did. Granted credit looked like shit, every trend line I try and draw has been broken, but hey it's probably just a head fake right..

How many of you were positioned for the highest sharpe trade in all the land - pre FOMC drift up and when it didn't come held last night as visions of sugar plums danced in your heads. Seemed simple enough. Kicking myself for being swayed into thinking JP would don his red velvet suit and ride to the rescue. But alas this is not Ben or Janet's Fed and Powell seems only want to steer the ship with the twin mirrors of GDP growth and unemployment. How simple it would have been to give the slightest nod to even their ability to tweak QT would have surely brought some relief, or at least modicum of confidence in a man who seems to be not much brighter if not a better speaker than our current pres. I really think that JP should take a lesson out of the orange faced one's book and just start tweeting policy. Market's down - tweet the sheet! Balance sheet that is.

Anyway, I'm giving punters the night to digest the latest news or lack thereof. Oversold anyone. Santa's still got plenty of time...famous last words.

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Anonymous
admin
December 20, 2018 at 3:48 AM ×



Spitballing here, but he US market can give up the trumpy term rally over the next 12 months with the Asia and European markets taking it fairly well on the chin. No one has ever seen a market like this when considering the components that having driven this rally. The old theories of rotation and yield seeking may well break from old norms over the next 12 months...

Europe will never see 4% growth in my lifetime. Their overall surplus will keep there currency from collapsing but, the currency is and always will be an undervalued Deutsche mark.

Trumpy will come out with "this recession is not so bad..actually...its the recession we had to have...I ask my colleagues and they say..President..the American economy is still growing...So..this is the best recession any President has ever had"

Seriously, though, I don't think you can blame his fiscal policies. He should man up and tell the American public "you guys that bought the top of this e-commerce bubble...suck shit"

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Eddie
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December 20, 2018 at 8:25 AM ×

Let me add my 2bp to the balance sheet discussion.

The IOER stands above 0% for quite a while and is at 2.4% right now. This means excess reserves are no longer the hot potato they used to be during the heydays of QE. Unless you are a bank CEO who messed up his LCR (in which case you have some other, more serious things to think about) banks should be pretty much indifferent between holding cash and 2y treasuries at current levels. To me the whole balance sheet discussion happening now is a straw man at best and utter nonsense at worst. The lift to 0.5% back then in Dec 2015 was the real gamer changer imo.

Get the tomatoes ready while I put on my Mackintosh...

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Anonymous
admin
December 20, 2018 at 4:03 PM ×

From Chris Whalen (Institutional Risk Analyst):

The FED has 2 REAL questions where systemic risk and the potential for contagion are concerned that need to be watched carefully. The first is the question of liquidity transformation where the ETFs are concerned. Loan settlements can literally take MONTHS and ETF/Fund liquidity is minute to minute. Should the BKLN or SRLN ETF see outflows that test the integrity of sponsors and force-clear pricing the rest of the credit ETF/mutual fund market—8T$ AT LEAST— will certainly be impacted.

The second, and perhaps more important question (given the FED resolve in re the non-banks), is the degree to which so-called “collateral upgrades” have been done with CLO debt and LL’s themselves. In a nutshell, the now near total mandate to clear ALL interest rate and most credit swaps has created a pressing need for cash collateral to be posted at CCPs as initial margin. The BIS has estimated that swaps re-novated to CCPs have resulted in margin shortfalls are in the 4T$ range, and the primary users of swaps (insurance, hedge funds) are short of the acceptable sovereigns and cash to nearly this amount.

Over the past several years the custody banks and prime brokers have quietly managed to offer the users of derivatives the ability to swap corporate securities OF ALL KINDS WITH ALL RATINGS for UST collateral that can be REPOed for cash. Of course it is hugely profitable. The problems are equally obvious, and; ironically, are a repeat of what went wrong in 2008 as REPO funding market runs suddenly become, as Vince Lombardi once said: "not just everything, but the only thing.”

The above are some of the known-unknowns that LL and credit investors and will be dealing with in coming quarters. It is important to remember ALWAYS that these are specific issues that will be playing out against an economic backdrop that has become clearly hostile to credit of all kinds; and when all is said and done LL’s, CLOs and ETFs are all just different ways of packaging what is essentially raw credit risk—with few covenants and even fewer supporting market makers—into “securities” that are designed to appeal to retail investors that have been yield starved for more than a decade. If ever there was a text book smart money/stupid money trade, it is probably this market right now.

Ruh-roh...

Moniker

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JohnL
admin
December 20, 2018 at 5:54 PM ×

Moniker, Jeff Snider of Alhambra investments has been beating the drum on this for a bit. Repo fails seem to be a tell in this game.

https://www.alhambrapartners.com/2018/11/20/2018-the-collateral-case/

Offshore/eurodollar plumbing is a fair bit over my head but it sure looks like the wild west and likely the source of next dislocation. When the underlying collateral begins to collapse with leverage at 10x-30x multiple times, I'm sure things will get exciting right quick.

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Cbus20122
admin
December 20, 2018 at 6:13 PM ×

Good post Moniker. I agree 100%, and while the credit market and currency plumbing problems are much bigger than just leveraged loans / junk, there is usually a match that lights a fire. I mentioned a few days back that I noted some enormous illiquid downward movement in areas that don't normally move downward. This is a gigantic red waving flag suggesting major fear around credit sector, largely regarding liquidity.

Just to get a gauge of this, pull up a chart of $Main, which is a very well run BDC. That enormous weekly candle is the result of multiple daily -4% downward moves on zero company news. You can see this elsewhere as well (JNK, BKLN, other bdc's, mortgage reit's) but I like to use Main as an example to show that the market is thinking there is something more systemic in nature going on here.

We've had other slowdowns in the economy, but we haven't faced proper liquidity risk and systemic fear like we are now since the GFC. Whether that is warranted or not will have to wait to be seen, but I don't like to ignore these types of things going on in the plumbing of the market.

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julia franklin
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December 20, 2018 at 7:40 PM ×


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fcp
admin
December 21, 2018 at 5:45 AM ×

For the first time in a long time, guessing the path of maximum pain in equities is up.
Heard it here first!

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Nico
admin
December 21, 2018 at 7:08 AM ×

i've neutralised spoos short overnight with equal nominal of Eurostoxx long and 20% more for a slight long i agree with fcp you heard it here first !

2640 at end of year should be a magnet for Spoos - and ideally removing long Europe at Spoos 2720 level and 2820 level (tall order)

note that Eurostoxx futures started to trade overnight last Sunday (for clips of 50 at a time, liquidity is not great yet)

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Anonymous
admin
December 21, 2018 at 2:36 PM ×

3 month LIBOR above 10 year treasury. Doh!

Moniker

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Leftback
admin
December 22, 2018 at 5:29 PM ×

I am going to begin in light-hearted mode, but then I am going to turn quite serious about what needs to happen.

There used to be a blog called "LOL Fed"; perhaps this blog should be renamed "Macro Follies"? They say that the Fed always tightens too much, finally tightening until something breaks, because when it comes to listening to the economy, they are tone deaf. It's only when someone in the landing industry yelled in their ear that they responded in 2008.

I think it's quite clear now to anyone with a brain that something has broken. Nobody really gives a monkey's what happens to FANG, but when the loan and HY credit markets freeze we are back in systemic risk land again. We are back in a mini-crisis here. Another display of macro machismo from Powell and we will be in serious trouble. People who think this decline in equities is nothing to get upset about are completely missing the point. It's not about FANG - it's the credit markets are the life blood of the economy, and once overnight liquidity dries up we are all looking at a yuuuuge recession. Trump's not wrong on this one, believe me. The man knows about debt, right?

You can expect commentators like Gundlach to be banging away on Monday morning on this topic. Although I am not surprised that the Fed has been shockingly stupid, not for the first time, it is especially shocking that they have tripped over their own feet so farcically into end of year - at a time when liquidity is always thin, and in the process have created a completely unnecessary and totally avoidable crisis.

Even if the Fed rolls over and plays nice doggy next week, the damage has been done. Credit market stress will remain elevated b/c it's a real market that moves slowly, and sometimes goes bidless, without nanosecond algo-driven providers of liquidity. This event will cause spreads to widen and remain elevated for some time and it will affect the economy.

Listen up, Fed. It's time to bring on a sub. Call Kashkari, Bernanke or anyone else with experience of crisis management. Even Granny Yellen would do. Get Powell and half of those clueless regional bank presidents out of the office and get someone in who can get something done.

Get to the showers for an early bath, Powell. You are a complete kn*b. What on Earth convinced anyone you could do this job? You have a law degree. You have no training in economics, no real-life trading experience, nothing to suggest that you would be able to handle one of the most important jobs in the world.

Go home now, Powell - and let someone else clean up the mess that you have created - wantonly and needlessly by not allowing yourself to be educated at the presser regarding the rate of the balance sheet run-off. The QT program is $0.6T/yr, which is equal to about 3% of GDP. Since you like the idea of being data-dependent so much (Instead of thinking or listening), let's look at the Q3 GDP, it's 3.4%, now subtract 3% and we are almost flat. Why are you too stupid to think this through?

Someone is going to have to inject liquidity for a few days or there will be another 1987 and your f*cking name will be on it, Powell. Don't be surprised if we see evidence of the BoJ getting involved over the weekend or on Monday, especially if there is a huge fall in USDJPY overnight.

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Leftback
admin
December 22, 2018 at 5:32 PM ×

Btw, I think we would all have to predict that sanity will prevail by Friday, and this coming week may turn out to be one of the best times to sell vol and Treasuries and to go long equities, especially non-USD denominated equities, EM FX and commodities.

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Anonymous
admin
December 22, 2018 at 6:40 PM ×

While I agree with your final mkt call, I think u have shown a serious lack of perspective with regards to credit. Us hy index is like 475bp, Eu xover is 360bps. Crisis levels on these were 1300-1700. Current levels are totally normal, a few distressed energy bonds and some hung bridges on overleveraged cr*p is healthy normal and natural.

Powell is doing a sterling job of focusing on what matters and not twisting everything to support the ponzi. Deflating this now and reintroducing sanity to credit is long term positive. Now, if this spirals to the point where there is potential for serious damage then sure they need to change but they’ve already told you they will be there if that happens.

Btw Powell is self made, 100+ bucks in finance, is wager he has a much better feel for these things than your typical academic central banker.

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Anonymous
admin
December 22, 2018 at 7:58 PM ×

@LB

Fiat, fractional reserve, reserve currency inside a post-Breton Woods Eurodollar world where demand has been pulled forward since 1981. Crises amplitude is going to grow as the decades pass. Your prescription of the Bernanke Bullpen will only keep pushing a string.

It ain’t JP’s fault. The original sin of Executive Order 12631, Clinton/Cuomo Community Reinvestment Act, obligatory M2 flood in election years and too few dollars to go around is coming home to roost. Negative rates, $20T balance sheets, toilet paper currencies? Are those your prescriptions?

We have a bankruptcy code (supposedly) for a reason. Wonder what 2008/9 would have been like w/o TARP and with M2M staying in? Probably like 1920-21, but we’ll never know. Bankruptcy, bankruptcy, bankruptcy. Say it with me. That’s the only solution to fucked up, living dead credit markets.

Somebody’s gonna have to be Daddy. Last daddy we had was Volcker. Jerome needs to own 1987-2018 and put spoon feeding to death for good.

Moniker

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IPA
admin
December 22, 2018 at 8:21 PM ×

ALL Anons, why not put a name next to your statement? Please get a handle going so we can reply to your comments more efficiently.

@LB, Powell was nominated by Trump who wanted an "outsider to get things right". He was almost unanemously approved by Senate Banking Commettee (Warren was a lone dissenter). Let's not forget that. Would this be a good time to fire the guy so many thought would be right for the job? Hardly. It would probably result in an armageddon. US would immediately lose its high credit rating, equities and treasuries would get decimated, credit markets would definitely freeze. Life after independent Fed? None. Markets have been worried about this since Powell's presser, imho.

I am out of 3/4 of my XRT short (still have a runner targeting 32 but not feeling it as I don't think a recession is near), out of 1/2 XHB short (yet another new low, remainder is targeting 28), mostly holding my IYR short (REITs are getting demolished here, decisive break below Oct low with multiple targets below) as liquidation in everything else is forcing traders to sell safe havens as well. TLT short is kicking my butt (can't be right on everything) but I am sure many here have noticed its behavior in the last few days as 10-Yr yield may have found some kind of s/t bottom here (Apr-May support). Something is definitely wrong as TLT is not making new highs even as equities are making new lows, gotta think the faith in our treasuries may be questioned somewhat with possible protractive gov't squabble and a possible firing of our financial system king. Also, rates can't go down too much yet as we don't really have any hint of recession other than grumpy ole men on wall street predicting one and needing a pacifier to fall asleep at night. More importantly, if an equity rally in January ensues on better than expected econodata or simply due to extremely oversold conditions, then who needs treasuries?

Gotta have well-placed trailing stops on all equity shorts just in case a face-ripper cometh. Fun times ahead...

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Shameless
admin
December 22, 2018 at 8:45 PM ×

So long usdjpy, puts on HYG and long VIX. Let’s see how till Powell is quietly asked to resign.

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Shameless
admin
December 22, 2018 at 8:49 PM ×

I think I meant short the first pair..whoops.

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Anonymous
admin
December 22, 2018 at 9:20 PM ×

@IPA

Handles? We don’t need no stinking handles!

Moniker

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IPA
admin
December 23, 2018 at 12:45 AM ×

Ok Moniker, you may be the new self-proclaimed anarchist here but keeping track of anons is not only confusing but also very unproductive. I ain't got no time differentiating between your posts, especially after I read dozens of them in a row not knowing who exactly said what. But do as you wish, sir.

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Moniker
admin
December 23, 2018 at 1:17 AM ×

IPA,

Keep your knickers on. Just funnin’ brother...

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Leftback
admin
December 23, 2018 at 2:39 AM ×

With respect, you're mostly all wrong about the potential severity of this, like people were wrong about the Bear Stearns event being insignificant. We almost went down this road in early 2016, but the Shanghai accord happened when most countries were on the same page, and that's probably impossible now. I do think something limited will get done.

We are facing an ocean of geopolitical risks (Brexit, China slowdown, French revolution numéro deux, trade wars) and a slowing global economy. The first sign was the EM meltdown, then the commodity collapse, plummeting inflation expectations, and now we have US credit stress. Why on earth would you hike rates into that scenario when you simply don't have to? Because of some 12 yo with a computer model? What earthly purpose did they think would be achieved by the hike, considering the market had already done the Fed's work at the front end? IDIOCY. Of course markets knew the December hike was coming anyway, but why would you then add insult to injury by having the arrogance not to acknowledge uncertainty in the future trajectory of QT as well as rates, even when spoon fed the question? HUBRIS.

Nobody is saying that TARP, M2M suspension, zombie companies and QE1-3 were Powell's fault. We know that QE3 went too far, and was maintained for too long, and it led to corporate buybacks and a lot of misguided asset allocation that also wasn't Powell's fault - but look, this is where we are - it is the hand he was dealt, and there were no secrets about what he was getting into. He has to now chart a sensible course forward from here. IDEOLOGY MUST YIELD TO PRAGMATISM, BoJ style.

Kuroda and the BoJ heads of the past 20 years would probably laugh uproariously at the huge policy errors being perpetrated here, just as they laugh at the victims of the Widow-maker JGB trade. The fact is, no-one yet knows if QE can be successfully reversed, and it's likely that even if this can in fact be achieved, it may have to be done extremely slowly, perhaps over 50-100 years, and with great caution. Or do they simply think the US is exceptional? SHALLOW THINKING.

When you're riding a bicycle, you have to use the brake judiciously. Powell is about to find out the hard way that if you brake too hard, something bad happens; in this case you find that you can easily go over the handlebars. IRRESPONSIBLE.

There is one more problem the Fed need to consider. DB is trading like it will be the next Lehman, which it very well might be considering its systemic importance, loan and derivative books. You seriously think you want to tighten now? Thinking that you can control something you don't understand is simply hubris. STUPID STUPID STUPID.

The Fed is arguably 50 bps too tight already - not to even mention the balance sheet issue, which might be more serious in terms of market liquidity. Someone on the FOMC, preferably not Powell, is going to have to walk this back, starting with one simple nuance - the acceptance that the balance sheet run off rate can be varied, and that this crucial piece of policy is not in fact on autopilot. This can and should be communicated immediately on Monday morning. This is not a surprise. It's not a shock that the Fed model is in error. The Fed is always late to recognize and accept every major economic inflection point. Flawed data inputs to flawed economic models ALWAYS lead to flawed projections. We see this every year from the Fed.

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Leftback
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December 23, 2018 at 2:46 AM ×

OK, some 2019 predictions:

A lot of egg on Fed face is going to follow this December to Remember, as a 2s10s yield curve inversion probably will occur in 2019 and we will see a near recession in the US (0-1% in Q1-Q2), even if the Fed reverse course in the first half of the year. The policy error has already been made, and now we are just discussing how to mitigate the results. Japan has had several such events, but the BoJ have learned from decades of bitter experience that it's extremely easy to deflate, and much harder to inflate.

Santa is fueling the electric Tesla-produced sleigh, still optimistic for a very very late run with the reindeer this year. The major concern is that the Fed will blast St Nick out of the skies before he can get near to the chimney. Uncle Ebenezer Scrooge, played here so convincingly by Powell, clearly thinks that tight monetary policy is all that matters, and that Christmas is a HUMBUG. Will he be visited by the ghosts of Christmas Past, Present and Future? Where is "Tiny Tim" Geithner these days?

Fwiw, I think sanity prevails at the Fed, and some nuanced yet clear communication emerges regarding "increased uncertainty for monetary policy". That change, with renewed chatter out of China regarding fiscal stimulus, will dispel the recent gloom in capital markets. US econ data will be weak, but corporate earnings will surprise to the upside, for a while at least.

Others have predicted parts of this, and I will now go further. NO more rate hikes. Done. Zero. The balance sheet runoff will be decelerated as soon as Q1 and may even be put on hold before Q3. There will be one or more rate CUTS in Q3-Q4. US equities will do better than expected in Q1-2, and then will do poorly in the second half even as the US economy picks up to trend growth of 2%. EM will outperform DMs, and energy and commodities will be unexpectedly strong in the first half. The dollar will weaken, to the surprise of many, and cable will rally strongly, to the surprise of almost everyone. AUD and CAD will do surprisingly well in the first half on a modest China-driven commodity rally.

Munis, REITs, miners and metals, utilities, energy, drillers, homebuilders, autos, telecoms, high yield bonds - mostly going to do better than expected. Transports, consumer, retail, luxury goods, aviation, health care, refiners - not so good as commodity prices rise again as discretionary income declines. Computers, semis, crypto - these are all broken stories and it's going to be that way for a while.

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Anonymous
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December 23, 2018 at 10:43 AM ×



lefty..2019 predictions.

Amps fixes his back and hits the gym again. Manages to stay once again a free disease zone. Fly's into Thailand and grabs himself a Thai girl and further hits the beaches. Continues from from there to kidnap a data scientist that punts. Locks both them up into separate rooms, and ghosts the rest of the world around him.

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Jim
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December 24, 2018 at 1:27 AM ×

LB: "This can and should be communicated immediately on Monday morning."

This will add fuel to the existing panic tomorrow.

Following LB's advice:

"Treasury Secretary calls bank CEOs as economic anxiety grows"

Treasury Secretary Steven Mnuchin called the chief executive officers of six of America’s leading banks Sunday to garner their assurance at a time of economic anxiety that there is no replay of the 2008 Great Recession on the horizon.

According to a statement from the department, Mr. Mnuchin received assurances from the CEOs in separate calls that “they have ample liquidity available for lending to consumer, business markets, and all other market operations.”

https://www.washingtontimes.com/news/2018/dec/23/steven-mnuchin-calls-bank-ceos-after-fed-interest-/


Hold on to your hats!

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Jim
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December 24, 2018 at 2:13 AM ×

The Supreme Court just issued a stay on sanctions imposed by Special Counsels Office ( Mueller ) on a foreign entity, most likely Deutsche Bank.

Could be the reason for the phone calls to the banks by the Treasury Secretary

https://twitter.com/adamliptak/status/1076992481726742529

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Moniker
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December 24, 2018 at 3:00 AM ×

Somebody pick this apart:

DB already circling the drain. This super double secret Supreme Court/Mueller subpoena thing pops up. Dems take over in January. DB gets exposed to the tender mercies of US Govt inquiries. Counter parties pull liquidity. The Dems, in vent of spleen to get Trump, inadvertently tip the German Turd into oblivion and we’re off to the races for real.

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Eddie
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December 24, 2018 at 1:00 PM ×

I usually don't make predictions but I think the situation is clear enough to give it a try. Before I start, happy holidays everyone!

Imo the party is over. Uncle Jerome kept saying that the Fed put is dead for good and carries the punch bowl away. This is a good opportunity to sneak to the exit since there is still a chance to catch a taxi (i.e. bid) while Richard Retail tries to get the last sip from the bowl. Several stock markets outside the US are either trading in bear territory (Germany, UK, Italy, Spai, China) or reasonably close (Russia, Brazil, UK, Japan).

Leveraged loan investors are puking (sorry for lacking a better word, but when I look at the LSTA index lately the picture just comes to mind) while buyers run to the hills. This is very 2007/2008 when Goldpants bit the bullet and sold 1bn loans at 93 (which was a smart move in hindsight since TXU went belly up in 2014). 2015/2016 was different, these were some shale drillers that simply levered up too much and couldn't get fresh money any more. This time the issues are wider spread.

BBB spreads are also on the rise and broke out of their channel which kept them below 160. Right now we are at 194 and counting. Given the fact that about half of the IG bond universe out there is BBB rated this means that some people will have a hard time getting fresh money at good prices at a time when balance sheets leverage stands at record highs. I smell some dividend cuts.

Finally, according to a recent New York Times survey, almost half of all 134 CEOs polled believe that
the U.S. will be in a recession by the end of 2019 and some 75, 80 percent of CFOs world wide think we will go into a recession. When I have to choose whether to listen to the guys on the ground or to some Wall Street analyst or even worse, an economist, I prefer the former all day long.

Winners 2019 will be cash, short term treasuries (at some point in the future the higher amount of US debt thanks to His Orangeness combined with the lack of an indifferent buyer will be bad news for the buck but in the short term I think a flight to safety will provide a decent bid), gold and gold miners. And Nico will finally be right and not early anymore.

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Eddie
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December 24, 2018 at 1:02 PM ×

As a side note, The Stool aka Aunt Janet is hedging her bets. What a difference a year makes, especially when you are not in charge anymore...

June 27, 2017:

“Would I say there will never, ever be another financial crisis? You know probably that would be going too far but I do think we’re much safer and I hope that it will not be in our lifetimes and I don’t believe it will be,”

One month ago:

(Marketwatch): Janet Yellen is worried about the next financial crisis and told a small, intimate audience at an event Wednesday night in Washington, D.C., that her biggest concerns were the potential for reversal of financial safeguards put in place after the crisis and growing corporate debt. “I am worried that we are in a deregulatory mode and I see a lot of pressures building in the system to go further to really weaken fundamental safeguards that were created in Dodd-Frank. We are a decade after the financial crisis so that would be worrisome and wrong to do,”...
One of the most important questions she and her colleagues face, she said, is what monetary policy tools exist to address the next recession. Although interest rates will rise from the zero levels we had for seven years, they are likely to stay relatively low. That means, said Yellen, that monetary policy’s traditional short-term interest rate lever is not available to address a new downturn in the economy.

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Leftback
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December 24, 2018 at 2:24 PM ×

I agree with most of that, but with respect to the 2nd half of 2019, Eddie, not the 1st half.

Today looks like a great day to sell some vol (Treasuries too). Fear/Greed index at 3. Extreme Fear. VIX 31. Bears are going to take something off the table and go home. Nobody left to sell.

2400 SPX may have been designated as the line in the sand. If you believe in the PPT, which we don't, right? ;-)

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Anonymous
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December 24, 2018 at 2:53 PM ×



The Macro Man fund investor book is full...Leftback. I cannot find one billionaire from England or Israel on the books...go figure. Merry Christmas to you too. How much longer does amps have live to on Bet365 these days?

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Anonymous
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December 24, 2018 at 3:46 PM ×

"The three-judge D.C. Circuit panel rejected the firm’s argument that its status as an extension of a foreign government makes it immune from grand jury subpoenas. The judges also said they were not persuaded by the firm’s claims that complying with the subpoena would be violating the law in the company’s home country."

Can DB claim that it is an extension of Germany gov?

Sounds to me this is a foreign state owned bank.

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Leftback
admin
December 24, 2018 at 4:08 PM ×

CNN F&G index is now 2. This is a 2008 style reaction to a 2000 style event.

I didn't know the history of Dec 2000, Sven H had some charts on it yesterday. Eerie similarities - all of which means that 2001 might be an interesting template going forward.

Ugly correction, mini-bear, call it what you will, but it is over for now. The bottom* is in, as of just after 10am today. Yesterday's close was the low on a daily closing basis. A real bear market is coming later on next year, however.

Another infamous LB Bottom call. Got rotten tomatoes?

*If Trump, Mnuchin and Powell would all just STFU. :-D

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IPA
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December 24, 2018 at 8:01 PM ×

@LB, indeed, when punters are shedding safe havens at large the end could be near. Look at crazy declines in health care, utilities, staples and REITs. But whether this is a result of rotation or simply generation and hoarding of cash is still to be seen. It's prudent not to catch a falling knife and let this play out a bit and perhaps build some kind of a tradable bottom. I am still holding some of my shorts as the new lows may invite more selling into year-end. I think a real fear of possible dividend cuts is creeping in here. 1/4 of my IYR short target was hit @ 73.

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JohnL
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December 24, 2018 at 8:08 PM ×

Original MM in classic holiday form via tweeter.

https://twitter.com/5thrule/status/1077220751256834049?s=19

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Anonymous
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December 24, 2018 at 8:48 PM ×

On 15th Dec I gave two scenarios, and I think we are in the first - a partly hysteria induced mini bear which sees the USD weaken and increasingly just impacts overvalued US co's. My tgt of 2350-2500 was a little too sanguine as this price action doesn't suggest we've bottomed, wouldn't be surprised by 2150-2250 this week.

Ppl are looking for culprits where there are none. This is >50% positioning and once cleansed we may be over it rather quickly. ooh credit sold off! Of course it did - spooz did. There hasn't been a credit boom expect in china, and if china does not implode then this market is probably going to be alright fairly quickly - rates are low generally, ppl are employed, em's growing pretty well. More likely than not this is a flash in the pan.

I am very heartened by two things (I) ppl talking great depression analogies on twitter (ii) a large number of bears who bought in the low to mid 2400s to "play the bounce" but plan to reshort that bounce. This says we go lower faster, and then it ENDS. Yes that's right - YOU BUY (oil, non-US value) and you sell the fuck out of fixed income - and don't look back.

Good luck and happy holidays.

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Nico
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December 24, 2018 at 10:50 PM ×

Trump Grinch tweet today was so surreal i made it a cover photo on facebook. I need to show this to my kids in 2028. Cover photo, and cover spoos short. You were warned a thousand times on this house of cards: markets would break with algos months before economy actually tanks. Hope you are having fun, merry Christmas to all

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fcp
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December 25, 2018 at 12:51 AM ×

Utilities / XLU are trading at 5x net debt/EBITDA - still a good short here IMO. Most of the names haven't sold off, and if you still have an equity portfolio, it should outperform if this is the bottom.

As in 2008, they'll outperform in sell-offs that are driven by rotation, but will go down with the market when allocators pull money out

Perhaps there's another day or two in this.. and then have a sharp relief rally in the New Year, just to really hurt everyone who sold over the past couple of weeks.

Merry christmas all, thanks for the posts!

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Leftback
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December 25, 2018 at 4:41 PM ×

Merry Christmas, all. A few words of sanity before the feasting begins.

The World Is Not Ending. (Readers with long memories may recall a few other TWINE trades).

How can we be so sure? Look at the bond markets. If the world was ending, or an imminent recession or financial crisis was about to unfold we would already see the following: US10y < 2.25, 2s10s -25 bps, HY spreads >10, USDJPY falling 2¥ in a day, the safest and least liquid securities (preferreds etc..) being sold. None of this is happening.

2s10s re-steepened substantially yesterday, and 2s5s is no longer inverted. This suggests that the Treasury market has already begun to price in a change of Fed policy that will be revealed in the next few days or weeks.

VIX futures are massively in backwardation once again, as they were in February. These events are rare and never last long. Spot VIX is 36; Jan VIX futures, 26. Downside protection is extremely expensive here, as is typical at major market lows.

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Leftback
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December 25, 2018 at 4:47 PM ×

As a naturally somewhat conservative and frequently bearish investor, I can say that for only the second time in my life, I have been stunned by a sequence of 5-6 sigma-type events. While the sell off is something one expected, the intensity of the forced selling is far far worse than one could ever have imagined. The selling of yield at low prices never ceases to amaze, but those punters are simply selling what they can, because they have to, and because value is all they have left. If there is a sign that this is not the apocalypse, it is in preferreds. If REIT preferreds were being sold I would be in the bunker by now as that would be a sign of a massive liquidity crisis brewing.

@Jim: You misunderstood my comment. We never suggested that any member of the executive branch, Munchkin or Trump or even Ivanka, should tweet about liquidity, or call the banks or indeed communicate ANYTHING at all on Monday morning. They need to STFU. What we and most of the Street were suggesting is that there has been clear Fed policy error and that "guidance" needs to be amended.

It's CLEARLY the FED'S job to just step up and say this: "look, we made a mistake by running down the balance sheet too quickly. we are adjusting the run-off rate to $30B for now, and will review this again in January, but there will be no more rate hikes for the time being while we continue to assess the state of the US economy which remains healthy at this time". Who was it who said: "When the facts change, I change my mind"?

@Anon above is probably exactly right. This has been driven by a forced unwind of positioning errors among the usual culprits (leveraged long-only "hedge" funds) who were all the same pile of shit (FANGMAN etc.). As soon as this process ends, there will be a fairly rapid recovery in that component of the rest of the equity universe that represents a fairly normal level of economic activity. Like 2001, 2019 is not going to be a great year for unicorns. How bad the eventual recession will prove to be depends on the Fed's reaction function. The faster the FED amend the policy error, the better things will be in 2019-2020. If they do not, then they are criminally incompetent, insane, or just criminal.

Powell may be a perfectly nice man, but he is in over his head. He needs to go back to the Chevy Chase Club and step down in order to leave the job to someone who understands markets, especially bond markets. That would be Clarida, with a bit of help from Bullard and Kashkari in the future. Some of the other regional presidents are dumber than a box of rocks and should be placed in a closet with some puzzles until their terms expire.

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Leftback
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December 25, 2018 at 4:51 PM ×

Now, finally a few Reasons To Be Cheerful and Fill Yer Boots:

Yield is everywhere. It's time to unload the last of those munis, Treasuries etc… and take on some risk.

1. Interest rate risk is dead for another year, so get stuck in, lads and lasses. EM sovereign credit. US HY. mREITs.
2. In the UK there is increasing support for some negotiated Brexit deal. This is a good thing. UK dividends are on sale.
3. Emerging markets look decent. China bottomed out long ago, and all the bad news is priced in.
4. European equities aren't expensive - unless DB blows up. (Is this the crisis event markets fear?). Dividends.
5. OPEC will tweak the production cuts in the next week or two to put a floor under oil. Energy stocks with yield.

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Eschew Obfuscation
admin
December 25, 2018 at 7:30 PM ×

Grandpa always said banks are usually a good investment at a price/book below 1.

Based on that metric, the entire European financial system is either a screaming buy or is about to collapse

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Anonymous
admin
December 25, 2018 at 9:29 PM ×

@LB,

From a trader’s seat, you are spot on. From a citizen’s seat you’re dead wrong. The only criminal incompetence was the last 10 years, not the last 3 months. Powell will keep raising and the balance sheet will keep shrinking. Only a GSIB failure or major American industrial bankruptcy will stop it.

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checkmate
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December 26, 2018 at 8:20 AM ×

BPSPX now just 11%. Over the last mid term years anything sub 30 was a buy. You have to go back to 2008 to find a deeper plunge and then 2009 to match it as the bottom was put in place. Of course there was a huge amount of volatility during that entire process and certainly enough to severely damage those who were over eager but people nibbling their way in almost certainly made money from a market in a vacuum. For me the only question is which bit of the world trashed by a top down US market should be the target. I think I am tending to think dollar trashed emerging assets.

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December 26, 2018 at 11:46 AM ×

Hi, very nice article. Keep up the good work.
Please visit my site Movers and Packers in Mumbai

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December 26, 2018 at 11:47 AM ×

Hi! Thanks a lot! Excellent article.

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Moniker
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December 26, 2018 at 4:55 PM ×

Credit leads, equities follow.

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Nico
admin
December 26, 2018 at 8:46 PM ×

i just reshorted half size Spoos 120 points higher and less than 24 hours later - this is sick shit x125

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IPA
admin
December 27, 2018 at 2:44 AM ×

You can't reason with machines. Algos kick in and feed on momentum. This was across-the-board buying of everything that was not nailed down. Shit flew off the shelves and the stinkier it was the more it went up. One can't complain if one wanted a rally. So many needed this to recover their demolished portfolios and they got it. If you are shorting this then you fully believe that this was nothing but a bear market rally, one of the most impressive ones we have seen in years. Volume was heavy and in some cases by far exceeded the average. I don't know if this rally marks the end of selling but my trailing stops on shorts were hit and I'm still profitably out, albeit not at lower levels like I would have hoped. But hope is not a strategy and following a plan is a must.

I nibbled on some oil services stocks as I have been wanting to reload my longs there, but I was stingy on my bids, refused to chase (as always), and lower lows (they all managed to make earlier today before exploding higher) are still scaring the shit out of me. So I'm hoping for a pullback after today's nutsy move to form a s/t higher low and to get some calls as the group is simply crazy cheap. The world still needs oil.

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Eddie
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December 27, 2018 at 7:29 AM ×

@Eschew Obfuscation: Grandpa probably had an RoE target in mind, 10% say, and would be bank stocks at book value (or below) if the bank makes this 10%. If your bank only makes 5%, say, you would compensate for this by buying at 0.5 times book. If you look at the profitability of European banks you will see that most are... well... a bit away from that.

Thus the low multiples could also be a sign of lacking profitability. If you find a shop that is reasonably profitable and still trades way below book something is probably amiss, though.

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Leftback
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December 27, 2018 at 2:25 PM ×

I suspect this will not be a consensus view, but I think:

1) A major intermediate market low has been made, and will not be revisited until at least Q3/4 2019.
2) That shorting is going to be a painful experience for a while - but don't let that stop you.
3) Selling vol is likely to be profitable for a while, certainly until VIX is no longer in steep backwardation.
4) Recession will be averted, the yield curve has already re-steepened, and is no longer inverted, meaning
5) NO rate hikes in 2019; QT autopilot switched off, LOL. A more dovish Powell is already being priced in.
6) Emerging markets will pick up steam soon as China stimulus measures are rolled out.
7) Rates may drift higher as equities recover and spreads tighten, but US fixed income volatility will be low in 2019.
8) Oil is also in the process of bottoming as OPEC tweaks production targets.
9) Punters will complain about algo-driven volatility, and many will buy long vol vehicles.
10) Algo-driven volatility will decline in 2019. Punters will lose money in long vol vehicles.

[ducks to avoid rotten tomatoes]

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Anonymous
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December 27, 2018 at 3:37 PM ×

@LB,

On your 6), China's stimulus would be likely slow to come. 5) no rate hikes-likely only one; QT autopilot is going to be on for another 6 months

Besides the trade war, I think EU is the most risky place in 2019.

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Nico
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December 27, 2018 at 3:55 PM ×

@LB,

On your 2) Dax -3% today oblivious to Trumbtd

Deutsche Bank and the banks' end game, Cold War with China and the global exporters Cold War. They know the 2019 themes

Note for trading juveniles: Dax is the leading index in all things equity

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Moniker
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December 27, 2018 at 4:08 PM ×

2019 predictions:

-SPX bottoms between 1500-1600
-DB “fails” and merges
-EURUSD parity
-Britain crashes out 3/29
-Oil bottoms below $30
-Spreads over TSYs blow out to 1000bps+
-Rate hikes cease, QT continues
-Trump impeached by House, Senate can’t convict, refuses to resign

(Plugging ears to avoid hysterical laughter)

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cbus20122
admin
December 27, 2018 at 6:30 PM ×

Welp, if we're talking 2019 predictions, I'll add my 2 cents for kicks (will be fun to look back on).

1. Strong dollar continues higher counter to consensus views that the dollar weakens.
2. US economy holds in there for a little while, but slows noticeably as the rest of the world slows even more. US stocks continue to drop, with bigger growth names getting hurt the most at first. This will chop around, but the broad trend is downward.
3. Chinese stimulus rolls out, but isn't enough to prevent the global slowdowns.
4. US equities see a rally, but continue to make lower lows until autumn when things start to really break down.
5. Global real estate bubbles start to pop (home prices have already been faltering through 2018). Notably in Australia, Canada, Scandinavia, New Zealand, Hong Kong etc.
6. Liquidity continues to sputter, and will reach a systemic point where it dries up, causing huge issues as major dollar lenders pull away from the dollar short trade.
7. Europe enters a recession with riots and animosity becoming more and more prevalent.
8. Gold, copper, and commodities traded in USD eventually break down as the dollar rockets higher amidst emerging market debts being due and European weakness causing a surge in dollar value.
9. Long term US Treasury bonds perform relatively well if you purchased them before the fed cuts rates, but will quickly be sold off after the rate cut. They do not perform as well as they did in 2008 or 2001.
10. People will look back on everything that happened and be dumbfounded that we could see a major worldwide slowdown (or recession in some cases) without a 10/2 inversion. They may eventually realize the structural reasons why the 10 year yield isn't getting the same bid that 5 year treasuries have, but it will only be way after the fact.

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Anonymous
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December 27, 2018 at 10:15 PM ×

I don’t understand the USD bulls, it’s rich ok all the long term charts and is already as good is it gets. The chorus of ib’s calling for USD to weaken is the only red flag. Some forecasts:

1) European growth bounces back and with record low unemployment and high wage growth eurostoxx heads to 3300-3500. Higher rates temper the magnitude of the rally except in European financials which are the best performing sector of the year
2) European rates start to price in a hiking cycle of a shocking 50bp a year in strip.
3) EM continues it’s rceent stability and with boringness brings currency appreciation and better growth. India continues to surprise to the upside and the pace of its growth leads to an appreciation of emerging super power status
4) SPX stabilises as the FED sounds cautious. Weaker data does not turn into a recession and bonds sell off as more hikes get priced in. Spz after rallying off recent lows to 2600-2700, resumes a down trend later in the year to sub 2200 as higher rates and slower growth compared to other markets lead to continued dreading
5) UK rates rise in all Brexit scenarios, either to steady pound, or post deal/extension
6) China’s under the radar recessions continues but does not turn into the great credit collapse as continues suppression of defaults+stimulus and a trade deal with the US keep a lid on things
7) oil (wti) recovers to 60-70 as us capital markets demand cashflow from shale which reduces growth estimates

Now tbh most of these predictions are taking the other side of some of the trends this year that have led to a little value emerging (or lack of value emerging in bonds). Can’t say I’m certain of anything, but as a whole the excess in this cycle has been us tech and China credit, tech can burst without much pain (and it disintegrated get to nasdaq 2000 levels of crazy) and China credit may get punted for the n’th year. A lot of markets are not bubbly and actually quite reasonably valued. Ftse divi 5pct versus 1pct bonds? Eurostoxx low 4s versus 0 rates? Doesn’t seem like a difficult choice.

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Leftback
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December 28, 2018 at 2:45 AM ×

Great predictions, guys, if only we are able to locate them all in a year's time! Moniker's predos reads like a bear's wet dream or something out of Brueghel the Elder's depictions of bleak medieval winters. Hope he is wrong. The Triumph of Death..

LB is totally done for the year pontificating about the economy, Powell, the FED etc.. and is just going to talk markets and trading for a bit. This is a markets blog, with a side of economics. Or is it the other way around? Anyway, we are now 100% long equities and no bonds at all. It's a mix of mainly EMs, energy and some US names with a smidgen of FTSE.

For two days we have had talking heads and bloggers banging on about how they don't trust this market action, it's a bear market rally etc... This reminds me of something Polemic used to say often in this space. Price is News.

To be specific, as anyone who has ever worked in MSM knows very well, the market does its thing and then someone comes along and writes a headline at the end of the day, "the narrative", which is an amalgam of market sentiment (usually this is stale as it is a backward looking moving average), news flow and anything economic that happened that day, with some spin. It is almost always meaningless.

On 12.24, SPX pierced the lower Bolly band and registered an RSI of 19. Fear & Greed registered a low of 2. Extremes and imbalances. On 12.26, the market made a large move up off the low, including a monster reversal, and on 12.27 the market made a smaller move up, with another reversal. Both of these are bullish candles. There are no open gaps between the 12.26 low and the 12.27 close. RSI is now 39, and first major resistance is at the 20 day MA at 2600. These are all bullish indications in the short term. End of story for now. Price is News, and at the moment Price is simply not bearish.

Two intra-day reversals. Smart money index turned positive. 3-4pm buying, not selling. Look, they are buying spooz and they are going to buy until people sell vol and then they will buy some more, which might last a week, a month or half the year. Oil will be the key to the duration of this rally in US high yield and equities.

The chart for TLT is turning increasingly bearish. IPA may convert me to long bond bearishness, but that would be based on supply not inflation.

A few other observations. The yield curve has re-steepened, and 2s5s inversion is gone. That isn't bearish for equities. End of year re-balancing has yet to be completed, suggesting additional rotation from bonds into equities ahead.

Even GE is starting to trade better. Only DB trades like it is going to die. Europe hasn't joined in the equity recovery yet. This continues to concern me. For now I will take the FTSE and leave the rest of Europe alone for the time being until something breaks. It is not a perfect landscape out there but that doesn't mean there is no money to be made.

Price is News.

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Eddie
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December 28, 2018 at 7:24 AM ×

4) Recession will be averted, the yield curve has already re-steepened, and is no longer inverted, meaning

I am looking out for more FexEx style bomb shells. The news was bad, the change in sentiment compared to 3 months earlier was even worse. If more of those are coming a recession is probably close and the bear party just got started. If not we should chug along along.

@Moniker: Just for the record, if things go downhill in a serious manner my ultimate destination for the S&P is between 1200 and 1400 (which equals 8% to 10% long term return). Note that only one bear (the 2002 TMT edition) stopped at 8% so this is a conservative guess. And no, this is not some bear delusion and I took my medication this morning... at current levels he who buys and holds makes a measly 1% over the next 10 or so years... including some nice roller coaster rides for free.

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Anonymous
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December 28, 2018 at 3:49 PM ×

@LB

Here is the thing. While prices of equities look really great based on the last two days' motions, bonds and forex give us different messages. Things like treasury yields and JPY, all point to a still worrying and fearing mode. Is this normal in previous cycles? Or credits and currencies folks see something different altogether?

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cbus20122
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December 28, 2018 at 4:59 PM ×

The 10 year bull run has done a great job of conditioning investors to buy the damn dip. And in fairness, it was a good play, especially with central banks stimulating things away. This killed the traditional bear playbook and market cycle analysis since it never accounted for enormous stimulus coming in to prop up markets. This is what happened in 2011 as well as in 2016, which likely prevented those times from turning into outright bears or recessions.

So to me, the big key in 2019 is being right on calls for stimulus / easing policy, and to a further extent, the effect those policies have on being able to reverse market direction.

I'm bearish because we're hitting more limits with these policies. First off, all these policies have seen drastically diminishing returns the more they're implemented. Heck, Europe has been easing for the last 3 years and has almost nothing to show for it except rising populisum. Chinese stimulus was larger in 2015-2016, yet produced far less real gdp growth, and resulted in excessive capital flight. Now Europe is tightening into a slowdown, and China is hamstrung in being able to stimulate like they did before due to currency issues and the basic fact that they know they need to reign in debt over a longer course of time, not the other way around.

So while there will definitely be some course of easing as things head downhill, we're getting closer to the point where central banks and government policies lose control of things, and the economy / market acts like a natural market.

With that said, I'm wary of intervention still, and don't want to get caught short during a new record stimulus, which will likely kick the can down the road another year for a yet-shorter bull market, followed by more and more problems at the end of said bull.

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Moniker
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December 30, 2018 at 2:35 PM ×

As the coda for 2018 vibrates its last I have a couple of ironic thoughts. With apologies to the pure, short-term traders here, (see Skip over this post) consider:

- The United States now runs monetary policy using the Soviet Union playbook: appointed Politburo of politically savvy eggheads doling our largesse to the rent-seeking class while oblivious to the long-term well-being of its electorate.
- At “full” employment DM corporate and sovereign debt growth rates have and continue to outstrip GDP growth rates markedly.
- The level of DM political risk is higher today than at any time since the 1930s and 1970s. Will it end like 1789 or 1848?
- Over 51% of DM citizens are net-takers of transfer payments.
- Currencies can only take so much abuse (Dornbusch maxim applies here, however...see The Euro)

Demographics and character are the predicates of successful employment of leverage. Think carefully as you allocate. Good hunting.

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Gus
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December 31, 2018 at 4:23 PM ×

Steve Eisman believes that the probability of a “hard” Brexit is now at least 50%. He said that investors could bet against “anything in the UK” if Jeremy Corbyn were elected as prime minister after a hard Brexit (i.e., shorting big British retailers and banks).

Eisman outlined the nightmare scenario for U.K. investors: "The worst situation for the U.K. is to have a hard Brexit, a general election and Corbyn wins. It would be perceived extremely negatively by the U.K. market. You could short anything in the U.K. at that point. It wouldn’t matter. Just throw a dart at it — short it."

https://www.thetimes.co.uk/edition/business/hard-brexit-now-at-least-50-50-warns-the-big-short-jhb93h56r

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Nico
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December 31, 2018 at 8:07 PM ×

https://www.alhambrapartners.com/2018/12/31/mispriced-delusion/

happy new year

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Anonymous
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January 1, 2019 at 9:24 AM ×

What a joke that link is nico. I’ll paraphrase- Eurodollar big market so always right (now it’s inverted) except when it wasn’t earlier in 18 when it was deluded.

This market never got steep term premiums and true fear of owning bonds was not experienced so far this cycle. ECB amd Japan qe kept curves contained throughout 2018.

Now everyone is moving to other side of ship with 1-1.5 cuts priced into 2020. Can go further sure, but already it’s attractive to take the other side. My max fuckage scenario is US doesn’t tip into recession and curves resteepen into q2 when we take our 18 yield highs. With ecb qe ended, the realisation that the ecb will hike, and massive treasury supply the 10y and 30y get north of 4pct. Higher discount rates make it easier for s&p to go down to 1550-1800 when cycle turns in 2020

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checkmate
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January 1, 2019 at 11:47 AM ×

Gus,
Eisman has perhaps been paying attention and understands this Labour is unlike anything we have seen in the UK for nearly a century. Brexit is one thing ,but Corbyn takes it all to another level. I wish it were not so ,but buying UK equity risk is the proverbial 'picking up pennies, steamroller issue' .

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TraderJim
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January 2, 2019 at 8:48 AM ×

Thanks Nico for the link, that's a lot of money saying the Fed's got it wrong. A pull back from the Fed might drive the final stock market leg.

I agree with LB that some UK stocks are showing some great yields, and many of these companies generate income offshore, so should be 'somewhat' immune to politics. Also local REITs are dirt cheap and some with minimal retail exposure have been sold off with the pack.

I get the Corbyn risk, Credit Suisse running around saying 'get out now'. Corbyn to introduce wealth taxes and give away shares to workers.

But I can't pull the buy trigger, I'm being held back by that lousy China PMI reading, plus their reduction in sales tax receipts. I think the China cycle has a way to hit bottom, so a bit more fear to go yet.

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Nico
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January 2, 2019 at 2:41 PM ×

Anon 9:24 AM i am 100% with you - i just found the article fascinating - the sheer size of the positioning - it by no mean reflected my views as i propound we touch 1800 on spoos this year

the other fascinating aspect for me of current markets is that/how the US president plays the stock market. Trump's fate is now married to the spoos so what should we expect? if he wants reelection (it is an if) he'll want the market to tank as deep as possible as early as possible in 2018 so that the bear is done this year

as anyone else thought of that? then Trump still has 12 months or so to engineer a 'market recovery', find others to blame and present an economy 'on the mend' to voters in Autumn 2020

i am loving this thought because i have not read anyone in the blogosphere pitching such. So my call for 2019 is for sub-1800 spoos just to run stops on 2016 double bottom traders - a nearly 40% quick bear from September top

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Anonymous
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January 2, 2019 at 3:24 PM ×

@Nico,

Some conspiracy theorist would agree with you: Powell is in with Trump, so he raises the rates now so hard to cause recession and then quickly cuts rates to engineer a recovery just in time in 2020.

Trump trashes Powell to blame the recession on Fed. Powell stands up to Trump so that he gets credits for being independent.

The script is great and actors understand their roles perfectly.

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Gus
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January 2, 2019 at 3:28 PM ×

Nico ... I like your thought. My own recent thought is that Powell will continue hiking/QT-ing in 2019/20 out of spite, just to ensure that Trump's economy will be in shatters in time for the election. Paybacks for the suggestion that Trump wanted to fire Powell.

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Moniker
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January 2, 2019 at 3:38 PM ×

@Nico,

Yes. On 12/19/18 @ 7:42 in the post meridian. Reagan 84 redux.

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Anonymous
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January 2, 2019 at 6:16 PM ×


Moniker, you mentioned "meridian"...


Being the lonely trader I am, I have had the fortunate experience of being left alone to listen to just that... meridians. And they are peaking. Have been for a while...shaking all over the place on the trading desk on nightshift. Therefore, I have to make a confession... amps may have peaked all around in 2018. The body can only do so much. So, with that , I am going to write my will here on the macro man blog because amps the shakes has monetary assets in the pipeline that shouldn't fall into the wrong hands. I hereby, declare all monetary assets that are in the custody of unmentioned investigators of Westeros to donate all monetary and property assets to...me...in the next life.

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Anonymous
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January 3, 2019 at 2:40 AM ×


Fun fact...

Did you know that the Queen of England needs permission from the Government to enter the area of The City of London.

But not the Queen of Westeros.

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Leftback
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January 3, 2019 at 3:47 AM ×

Ugh. Things are getting a little messy as we start the New Year. Thank the Fed for a totally unnecessary crisis. Wankers. The Fed always makes the same mistake. They tweak one or more parameters of a complex system that exhibits reflexivity, and then fail to appreciate the long latency of the effects of their policy changes, continuing to tweak when they should have just waited and watched. They are incompetent, arrogant and hubristic. We can only pray they are not criminally stupid.

As of today, the yield curve is inverted between 1s and 7s; this happened very suddenly. That's just not normal. FX mini-crashes earlier this evening are another concern. This is either a recession of unusually rapid developments, or something else - a policy error. This is in fact a man-made crisis and I think we all know the man responsible {not Trump, although he isn't helping with the trade war}.

Here is a complex but coherent discussion of what is going on and the link between QT and interest rates:

https://www.zerohedge.com/news/2019-01-02/why-has-global-liquidity-crashed-again

Note the estimate that the Fed has actually done the equivalent of 20-30 hikes and not 9. If that's even close to accurate you can see why markets are in trouble.

Now, I want to repeat something I have explained here before. Let's go through this slowly so we don't have any goofy arguments about QT making rates go to the moon etc… (look at the 10y!).

The anticipation of QE causes sovereign rates to fall, as lack of liquidity causes institutions to load up on quality collateral, and other market players front-run the CBs. QE leads to higher rates, not lower, because central banks buy sovereign bonds and institutions are able to move out along the risk spectrum, resting in tighter credit spreads and higher equity prices.

The anticipation of QT causes sovereign rates to rise, as institutions front-run the CBs ("taper tantrum"). The actual QT leads to lower rates, because central banks withdraw liquidity and sell sovereign bonds; institutions are forced to move back into quality collateral, resting in wider credit spreads and lower equity prices.

OK, now we have that out of the way. What happens next? The crisis stage of the recent event clearly began after the Fed presser, when Powell made the "autopilot" statement. Waiting until the next FOMC meeting to address this would be a huge mistake. The yield curve (as well as other indicators) is sending an urgent message - not that we are in a recession, but that the funding markets are in acute distress.

It is beyond my understanding that Powell was unable to predict the market response. The unnecessary statements at the presser caught many punters leaning the wrong way heading into a period of traditionally thin and illiquid trading, and the results were like tossing a lighted cigarette into an ammunition depot. It simply beggars belief that Powell has yet to walk this back, and I believe he will have to take the opportunity of his Jan 4 speech to do so.

So if we follow this line of argument, then we are approaching the end of the liquidity crisis, but tomorrow will still be ugly. The bond market is pricing in a U-turn in Fed policy, and I believe such will be signaled this week.

Where are Janet Yellen and Jon Hilsenrath when you need them? It wasn't ideal, but that line of communication was effective and everything was telegraphed so that there were no surprises. Keep an eye on the WSJ for signs of sanity, or for an alternate Fed head to emerge as the thought leader. Something has to change - the QT experiment needs to be slowed down or terminated NOW - or Trump will be right about the greatest danger to the economy being the Fed.

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Leftback
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January 3, 2019 at 4:33 AM ×

A while ago we talked about the fact that the Fed would have to do some soothing of the markets when USDJPY started to fall by 2¥ at a clip. Well, we are there, it is happening. USDJPY flash crashed about 5¥ to the March low and is now down about 2¥ from yesterday's close. There was a massive flash crash in USDTRY as well, and a modest one in cable.

For those with cash, tomorrow might be a good day to do some bargain shopping, in Britain, Europe, China, and EMs in general. Many people have mentioned buying N225 viewing Japan as a safe haven, which we think is insane considering the fact that N225 is purely and simply a leveraged trade against JPY. Buy the yen if you must, but avoid the Nikkei. Go long JGBs!

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Cbus20122
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January 3, 2019 at 6:06 AM ×

How long have I been saying it's all about liquidity drying up in here? Liquidity, or rather, illiquidity is like a ball rolling down a mountain. Once you get it started, it only picks up momentum and takes out more in it's downward path.

Illiquidity causes more people to pull out of markets. And by that, I mean institutions, money lenders (of the dollar variety), algorithms.... everything. In a way, this is still a part of the big short vol trade which has the lovely effect of unwinding in a wonderful little feedback loop. Given, this unwind has a lot of fundamental roots, but if you're all surprised at how quick this has happened, I think you need to get back to your understanding of the market's structure right now and re-evaluate your views of how things can potentially unwind.

Also, everyone is being insanely naive about oil's move in the markets and what it says. Perhaps people have been lulled to sleep due to the fact that 2014's oil crash didn't cause a recession, but they're ignoring why that didn't cause a recession, and also are completely ignorant of the previous instances where massive drawdowns in oil like we have recently coincided with huge market crashes. There is nothing good you can say about oil dropping 40% in two months, and this issue is not just a simple political issue of Kashoggi like it or not (although that's a wonderful scapegoat).


Final note here, in mentioning 2015-2016, I'm going to keep pounding the table here... Quit being naive about the market's propensity to recover right now. We recovered in 2015-2016 because we saw record global stimulus, much of which started as early as 2014 (there is a lag here). Guess what's happening right now?

-China still is not easing in any real way (which is a huge huge issue)
-Europe is now tightening instead of easing
-USA has been materially tightening for a while.
-Japan is not opening the spigot either
-Even if we get more easing from any of the above, there will be a lag before it even affects markets materially.

We can talk all we want about fed mistakes, but this problem is far bigger than Powell.

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Anonymous
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January 3, 2019 at 6:15 AM ×



leftback..as we enter another year...it time face some truths. Its going to be another year of niggling for alpha seeking traders. That's because the hard truth is that the only alpha there is in Pacific Asia is not functioning anymore...god love him. That's the hard truth. So the mob on wall street and from the city of london will keep digging away at what alpha can be had...and want can't ...be will destroyed from the inning workings of spite. Clear and simple...no need for annual research report this year...its just going to be the same as usual. They hold everyone else in contempt.

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