VOYAGE PLAN FOR WEEK COMMENCING 1JUL19

Sell AUDUSD .6995-.7005

We are targeting .6910 & .6850 with SL at .7051

This should bearish engulf today (close below .6998)

This should bearish engulf today (close below .6998)

1. Chinese data continues to turn lower
2. Short squeeze of 9 days now run its course with medium term resistance .7050.

Trade of the week is what we are thinking of doing not what you should do, opinions not advice & all that

VOYAGE PLAN FOR WEEK COMMENCING 17JUN19

Trade of the (FOMC) week: Selling bonds / long yield

New York.jpg
  1. Trump has done it again. Everything plus the kitchen sink to get stocks higher.

  2. Current equity valuations will make it difficult for Powell to cut rates.

  3. US Bond positioning at 2008 levels.

  4. Daily candle looks like a false break lower and a possible turn candle.

  5. Bond prices are massively overbought and our proprietary sentiment indicator is at 90/100.

  6. DeMark sell signal in TLT and 10 year notes.

The trade of the week this week is sell US 10 Year bonds when yield gets to 2.10% ( current yield is 2.06%). Stop Loss is yield back below 2.00% T/P is yield 2.30%

Risk reward is great. 

/Privateer

VOYAGE PLAN FOR WEEK COMMENCING 10JUN19

Thoughts for the week ahead :

The trade of the week this week is sell USDJPY 109.00-10 with a stop loss 109.55. We are targeting a move to 107.55

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  1. When will this short squeeze in equities end ? Chinese stocks not following/ copper crushed/ gold higher/ forward earnings shifting lower ........

  2. Risk off still on the cards with the same storylines driving sentiment (Italy, China, US politics, & Brexit)

  3. EURUSD weekly chart is saying change in trend

  4. US rates bouncing along at the bottom

  5. US CPI on Wednesday should be tame

Voyage Plan for Week Commencing 03Jun19

Thoughts for the week ahead :

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1. Lots of risk events this week PMIs, RBA, ECB, NFP, and many important CB speakers

2. Risk off still in the cards with the same storylines driving sentiment (Italy, China, US politics, & Brexit)

3. Trump will be teased mercilessly while in UK. This will not help his mood and make it more likely that he says contentious stuff on twitter

4. Phillip Lane will be chief economist ECB first time this meeting. He looks set for lower economic projections on Thursday

5. Oil thumped last week confirms bear trend and risk off.

The trade of the week this week is sell EURUSD 1.1170-1.1190 with a stop loss 1.1212. The stop is close because we looking for PMIs to make the initial push lower this morning. If the PMIs come in hot we will cut. We add below 1.1108 with target 1.1055 for the week.

Voyage Plan for Week Commencing 27May19

Thoughts for the week ahead :

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  1. USD looks like it wants to turn lower.

  2. Risk off still in the cards with the same storylines driving sentiment (Italy, China, US politics, & Brexit)

  3. Oil remains an important driver, we don't think this gets above 60.50 this week.

Trade of the week is long Gold.

We trade gold on the futures markets so the entry will be here 1283.00. We are targeting a move through 1300 this week, and think this can go a lot higher in the weeks ahead.

US GDP release on Thursday will be a key risk moment for this trade.

Voyage Plan for Week Commencing 20May19

Thoughts for the week ahead

photo from Shutterstock

photo from Shutterstock

1. AUDUSD pop on the open does not make any sense to us, we sell AUDUSD 6921-51 for a move immediately back lower.

RBA minutes Tues

2. China US trade war goes nowhere this week 2900 caps ESM9

3. FOMC will be decidedly neutral this week, this will not help EURUSD or GBPUSD

Trade of the week short AUDUSD 6921-51 for move to 6821. Let’s be careful of minutes release early Tuesday morning in Europe.

We are all watching USDCNH for clues this week for direction on risk.

Back end of the week has political risk in Europe. We like to express this with short BTP.

Finally we still like CAD to appreciate in the coming weeks

People are underestimating the underlying strength within this market. All the bad news (housing) seems to be priced in.

/Privateer

Voyage Plan for Week Commencing 13May19

Thoughts for the week ahead :

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1. Trade war will neither escalate or be solved any time soon.

2. Pretty big week of data for Europe this week, we don t think this will show signs

of strength

3. Aud wage data and employment look likely to show lower inflation and neutral

job growth

4. Canadian numbers of Friday were extra ordinary and market looks set to get

caught long usdcad

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Trade of the week short USDCAD 1.3415/35 region with sl 1.3488 and target 1.3305

There is a fair amount of talk after the big rally in equities Friday that we risk a “melt

up” situation for S&P’s. We do not share this fear and in fact think the damage has

been done so the correct strategy is to still sell high ones this week. China and Trump

are both ego driven and highly stubborn. We do not think this ends anytime soon.

Between 2905-2930 looks to be a good tactical re short area.

AUDJPY and AUDUSD could be at risk this week as there is lots of AUD data and

The trade war news should continue to leave things cloudy for sentiment in AUD

AUDUSD is a break trade now at .6995


All of the above is opinion only and should not be considered financial advice.

L'Allemagne et 'bond rates'

Petite histoire des taux réels en Allemagne.

photo by Pixabay

photo by Pixabay

Tout le monde connait la rigueur budgétaire allemande, la bonne gestion stricte de ses dépenses et de l'inflation, surtout en ayant en mémoire le traumatisme de l'hyperinflation de style vénézuélien de l'époque de la république de Weimar qui a finit par amener au pouvoir un certain Adolph Hitler. 

Accélérons le temps jusqu'à 2011 et nous nous retrouvons en plein milieu d'une crise grecque qui fait trembler les fondations même de l'édifice européen.

L'Allemagne, quant elle, brille par sa puissance industrielle depuis les années 60 et a connu d'abord un Deutschmark fort contre les autres devises européennes et, depuis la création européenne, une croissance plus forte de son économie que celle des autres pays européens, profitant d'un marché domestique composé de tous les membres de l'UE.

La force de l'Allemagne est la force de ses exportation vers de nombreux pays qui ne peuvent plus maintenant dévaluer pour contrer la puissance industrielle Allemande.

On peut comprendre qu'il est plus facile d'avoir une rigueur budgétaire avec une balance courante très positive et une politique monétaire qui profite aux pays qui ont le même profile (comme la Hollande). La majorité des pays européen se retrouvent en situation de déséquilibre budgétaire et de balance courante negative.

La conséquence pour les plus fragiles c'est de recourir à l'endettement pour financer la croissance.

Le plus fragile d'entre eux, la Grèce en paiera les conséquences au prix fort. Recession et reduction massive du pouvoir d'achat de ses habitants de plus de 25%.

Mais la Grèce est loin d'être le seul pays impacté: Irlande, Espagne, Italie, Portugal et même la France sont impactés par cette crise.

L'Allemagne est principalement impactée par la faiblesse de son système bancaire depuis la crise de 2008.

Sur toute la période depuis l'après guerre, l'Allemagne a eu des taux réels positifs, c'est à dire des taux supérieurs à l'inflation, ce qui permet de rémunérer l'épargne et le système financier dans une économie fortement industrielle.

Retour en 2011. La Grèce va être sauvée, finalement mais au prix d'un financement Européen de pratiquement 180 Millard d'euros, chaque pays contribuant au prorata de la taille de son économie, donc l'Allemagne en tête.

Néanmoins ce sauvetage est insuffisant car certains autres pays européens risquent de se retrouver dans la même situation que la Grèce et, compte tenu de leur taille( Italie, Espagne), pourraient entrainer toute la construction Européenne vers son explosion.

A l'image de la banque centrale américaine, la BCE, sous la houlette de Mr Draghi, s'engage à faire " Whatever it takes" ( ça ressemble bien à des moyens illimités!)  en juillet 2012 pour stabiliser l'édifice et l'aider jusqu'à un retour à l'autonomie économique.

En d'autre termes la BCE et toutes les banques centrales Européennes s'engagent à acheter la majorité des dettes souveraines européennes, mais aussi d'entreprises, dans un second temps, tout en finançant les banques avec des taux extrêmement bas pour leur permettre de se refaire une santé financière et de relancer la machine économique européenne par du credit.

En 2012 la croissance est quasi nulle en Europe et l'inflation entre 0 et 1%.

L'impact sur les marchés de taux est massif: Pour l'Allemagne, taux courts négatifs, taux long proches de 0 ( voire négatifs). les autre pays évoluent évoluent avec un écart de taux vis à vis de l'Allemagne. 

L'Allemagne est la référence et va pour la première fois avoir des taux réels négatifs.

C'est en effet positif pour la relance européenne et extraordinaire pour l'Allemagne qui finance ses développements industriels avec des taux proches de zéros et poursuit son développement vers les nouveaux pays qui se développent vite comme la Chine.

Par contre le système bancaire allemand reste le maillon faible Européen, comme on peut le voir avec la Deutsch Bank ou la Commerzbank, aujourd'hui proches de la faillite.

Aujourd'hui l'Allemagne a accrue son hégémonie économique en Europe, a réduit sa dette ( par rapport à son PIB) et s'est fortement développé a l'export sur les marchés asiatique.

Sa croissance se situe entre 1.8% et 2.8%, l'inflation se rapproche des 2% et les taux allemands n'ont toujours pas bougé depuis plus de cinq ans avec respectivement le 2 ans, 5 ans et 10 ans à -0.60%, -0.40% et 0.2%.

Cela met l'Allemagne en situation d'avoir les taux réels le plus négatifs depuis 2012!

Le risque de l'édifice allemand c'est que le poumon unique de sa croissance ce sont les exportations. Il n'y a plus aujourd'hui de rémunération de l'épargne et le fragilité de son marché action depuis l'automne 2018 nous montre que quelque problème que ce soit au niveau du commerce mondial (Chine, Etats- Unis principalement) les conséquences sont dramatiques au niveau domestique.

Enfin, l'un des piliers du sauvetage des banques allemandes passera par des taux plus hauts, au moins equivalents à l'inflation pour permettre à l'épargne de ne pas perdre de valeur et aux banques de refaire des marges.

Il est très difficile de prévoir le destin de l'Europe telle que nous la connaissons aujourd'hui mais il apparait insoutenable sur long terme d'avoir une économie ayant un support massif permanent et des taux maintenus artificiellement bas par la BCE

Gold, Bitcoin and Geopolitics.

Currencies were created to make people’s life easier because barter is way to difficult.

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Plato described the principles ruling the existence of money as the following: money is a simple social agreement allowing a system to function. Its basis is purely subjective, but what makes it valuable is the fact that all the parties accept its value. The State has the role to legally rule this «  social convention », which is essential.

Gold has had this function for thousands of years.

Now bitcoin. If we try to apply the same principle as any fiat currency, we have the social agreement aspect but we don’t have the legal aspect. 

It makes it incomplete and very fragile. 

The blockchain technology is a major revolution for the future but the bitcoins of the world lack the legal backbone that would make them go beyond the pure speculative (pyramid?) scheme.

Gold has plenty of shiny days ahead, especially if we consider the current state of the global monetary system, plagued by debt and huge monetary creation and all the geopolitical tension we are experiencing currently, some of them just being the consequences of extravagant money creation.

Monetary policy is a tool, not only for the economy but also a geopolitical tool, in particular in the case of the USA.

The USA swamped the world with USD to make sure most of the global trade is done with USD, which in return guarantee the global funding of the American deficit. 

We all know the famous phrase: Our debt. Your problem!

The current geopolitical tensions might have more to do with a world going from unipolar to multipolar, than being the white knight of the world.

It is only the beginning and I hope the Thucydide theory is not always right! 

Anyway Gold remains the fiat currency of last resort, as we saw during the global financial crisis and during the European crisis.

When all is well in the world, Gold becomes dependant on US interest rates.

The strange thing is that Gold is currently faring rather well with US rate rises when it should loose competitiveness vs cash.

The tensions are not about to end and Gold is here to stay!!

Now the technical of Gold:

Since the end of 2013 Gold has been in a very large bottom head and shoulder (bullish pattern) with a massive break area around $ 1363/1368 and a target around $ 1695.

I get the feeling that this could only be the first target.

Geopolitics, the FED & technical analysis

A market view on Currencies, Bonds & Equities

 

What we know today in this great world of financial markets is the following:

  • Fiscal reform in the US is positive for growth especially for the small and mid caps
  • Fiscal reform in the US will increase the US deficit by about USD 1.5 Trillion over 10 years, hopefully offset by more growth and fiscal receipts
  • The FED will raise at least three times this year, barring some unexpected major event
  • Global synchronised growth is gaining momentum, with Europe doing better than expected since last year
  • Global leverage and debt has never been as high as today.

What we don’t know yet but is having an impact on markets:

  • The US geopolitical soap opera is impacting not only domestically but globally
  • Global geopolitical situations, partly impacted by the Trump administration ( Middle East, Russia, US Tariffs,…)
  • Will extended PE be supported by strong enough earnings this year and the following?
  • Can the rate rises impact enough the economy to derail equities and credit markets globally?
  • Can the rise of volatility push investors into a lower risk or risk off mode?
  • Will ECB change its rate stance earlier rather than later (end 20128 vs end of 2019)?

We often say: buy the rumour sell the news!

If we follow this  we can definitely assume that we will sustain a very rocky ride in the months ahead.  We have already seen a glimpse of this at the end of January and this volatile consolidation is still going on.

Transition periods are extremely complex to chose a definite buy or sell side of a trade, but technical analysis is a good reminder of what the investor thoughts translate into market moves.

Let’s take a brief look at all the main asset classes, with the assumption that there is, as of this day, no major trigger to derail current markets but plenty of factors potentially generating more volatility,

Creating more risks but also more opportunities.

Currencies: 

  • The EUR/USD hbroke a major level at the end of January with plenty of momentum that pushed the pair higher than 1.25, which was the first technical resistance.
  • Since then the momentum has been lost and EUR/USD has moved between 1.2545 and 1.2160. the USD is totally undecided between the rate differential between the US and the EU (3% on 2yrs in favour of the US) and growth
  • That has gained a lot of momentum in the EU with a potential change of ECB stance. Moreover the increased size of US deficit is another potential negative for the greenback.
  • Short term the current pattern (a flag) is telling us the wee need a break above 1.2375 or below 1.2255 to find new momentum.
  • Longer term we need to either break above the 1.2540/45 area or below the 1.2088/93 area the change the current regime.
  • The dollar index remain bearish on the longer term with a neutral stance short term.
  • The Yen remains on the strong side because of the mentioned will of the BOJ to reduce long term bond purchases and of course because of the ongoing current surplus.
  • Currently the EM carry trade is also on a neutral technical stance because if the dollar gets stronger the EM currencies and economy should underperform.

Bonds:

  • The US has already started turning the table of their monetary policy and downward FED balance sheet adjustments. The 10yr currently at 2.87% is in a consolidating phase after firmly breaking above the big 2.63% resistance from the whole 2017. Any pullback only justified by increased volatility should be a sell trigger (2.80% all the way down to 2.65%). The minimum upside target for 2018 is 3.25%.
  • German rates ( 10yr) have also broken out of their 2017 pattern by breaking above the 0.50/0.60% area all the way to 0.81%. It is important to know that German rates are still negative in absolute terms up to the 6YR and the whole German yield curve is negative real yield. For the 10 years to be flat real yields, we would need to see it between 1.2% and 1.4%. We are currently in a consolidation with the 10 year at 0.57% and anywhere between now and 0.46% are good level to set up short positions.
  • Credit have widened for the first time in February in a long time, showing us the potential impact of increased rates, leverage and lack of liquidity of the segment of market massively invested by passive strategies.

Equities

  • DM have expensive valuations, probably supported by better growth but also by factor such as QE, central bank purchases of stocks and massive buy back funded by historical low rates.
  • The US is the leader in equity market richness.
  • We are currently in a slight consolidation, triggered by the realisation that increased rates, combined with increased debt can become potentially very negative factors.
  • Technically the SP has a short term negative momentum (a new leg down started on Friday?), that could bring us down to 2530, lows of February. Longer term a stronger consolidation could push the market to the 2400/2410 area which is a strong pivot point from 2017 and also a big Fibonacci retracement point ( 38.2%) from the last long term rally, since January 2016.
  • In Europe, though cheaper than the US the equity markets have been impacted by the increased volatility, the impact of the Euro, the current potential consequences of the US tariff war, but also positively impacted by higher growth than expected and seen in the last 10 years. If we take the SX5E (Eurostoxx 50), we are in a consolidation, rather bearish in which, it seem that a new leg down has started. Next support is 3305 with a potential target at 3140.
  • The upside in this market will be supported mostly by domestic economic strength of the Euro area. On the upside we need to see a real above 3475 for the market to gain positive momentum.

Et voila, time to trade.

Real Yields, growth and volatility

Any scary movie will always see the bad character rise again a last time when you think he or it is gone for good before the end.

We can assimilate volatility to fear and this fear factor will move up even faster when you have the following:

- Low volatility regime for a very long time;

- Large size of short volatility position through many support, most of them passive ( structure product, ETF short vol, plain long passive any risk assets);

- Continuous large flows into risk assets;

- PE extended 

- Rates tightening quickly because of improved economic conditions

- Real yields close to zero or negative.

It feels like the perfect storm ready to happen.

But the speed of the correction is mainly the result of large positions, leveraged, most of them passive or systematic and the weak liquidity resulting from these factors.

If we make a short history of 50 + volatility event, back to 2008, we can see the following:

- February 2018. Vol goes from 12.5% to 50 in less than 3 days;

- August 2015. Vol goes to 50 in 5 days;

- August 2011. Vol goes to 50 in more than 10 days and it started at 16%;

- September/October 2008. Vol starts at 20% in September and take 20 days to go to 48% on Sep 29th. It took more than 10 days to go 80 % on oct 10th.

The scariest part of all is the continuous acceleration to go from Dead Sea to perfect storm… unless what we saw was just an appetizer to put the Vix around the 20% level before next level of massive storm.

Difficult to see for the time being!

Let us see where we can see risks of correction because there doesn’t seem to be the right factors for a meltdown, as in 2008, baring the size of passive and/or systematic Asset management and the lack of liquidity in most assets.

-Rates: the US 10 years are now around 2.9% and real yields around 0.9%. If  growth is around 3% we still have some margin ( about 0.2%) before rates start impacting fixed income market, credit market and equities through lowered valuation. Credit liquidity in case of Risk Off is a real risk.

- Equities: massive passive inflows tend to create bubbles and tend to push bad stocks with good ones. The other aspect is extended valuation that could eventually sustain slightly higher rates if GDP and earning growth continue with the current positive momentum.

- Currencies: mainly USD/EUR and JPY. The fist pair tend to be alternatively affected by rate differential and by comparative growths. Since 2016 Europe growth has gone from slightly above 1% to almost 3%, vs the US oscillating slightly around 2 to 2.5%. In the meantime rate differential is really positive in favour of the US. Moreover the FED has started reducing the size of its balance sheet. But if growth continues this way in Europe, ECB will accelerate the pace to end its QE, to reduce its own balance sheet and to start raising rates. Currently the overall momentum favours the Euro. The Euro real yields, still almost 0.8% negative for Germany, also favour a potential more spectacular move of  yields higher. There doesn’t seem to be major imbalances between these three currencies at the moment.

In the End, the current economic environment remains positive for growth and for good market performances but many fear factors are still in place to trigger  quick and volatile moves that should keep the current volatility regime higher that what we saw last year. 

Real yields and central bank interventions.

On yield curves and hunting bows.

Photo by  Zoltan Tasi  on  Unsplash

Photo by Zoltan Tasi on Unsplash

It is no news to anyone following markets that asset prices have been skyrocketing since all the major central banks have been pouring money with

Their QE policies.

In term of yields, the goal has been so far reached by compressing rates all along the yield curve with ZIRP (zero interest rate policy) or even NIRP (negative interest rate policy)

For the short end of curve and by buying massively on the rest of the curve.

In term of real yield we basically have two historical phases, before the 2008 global financial crisis where I couldn’t find negative real yields except in the US between the end 1978 and the end 

Of 1980 when, then FED governor Paul Volker, embarked in a very aggressive inflation fight by raising rates.

After 2008 crisis, we didn’t immediately see negative real yield,  at least until the summer of 2011 when recovering economies were systemically shaken again with Europe/ Greece crisis.

The Fed started another QE and the ECB took extraordinary measures.

Since then the German yields have been in negative yield territory, except for a positive blip in 2014 when ECB was reducing its balance sheet.

The US have been on an off  in negative yield territory, mainly in period of QE acceleration.

Today the US curve is mainly in positive real yield territory. 

More accurately the 10 year has seen positive real yield since the end of October 2016 and the 5 year since may 2017.

On the other side of the Atlantic, the vision is totally different, mainly because of the relative size of ECB QE vs the Euro area GDP ( and Euro bond flows) and the ongoing QE cycle in Europe vs a phasing out in the US since last year.

Nevertheless the 5 yr bunds vs core inflation in Europe  is negative real yield about 1.3% and the 10 year about 0.6%.

When we take the European headline inflation (1.5%) the result is even more spectacular.

Despite the reduction in QE from a monthly Euro 60 Bn to half of that size the negative real yields are almost at the bottom.

The main reasons for this QE reduction are the fast recovery in Euro Area with over 2.2% growth ( and 2.8% latest number in Germany) and inflation griding higher.

The equation to solve here is: how long real yield in Europe ( Germany mainly) can remain in deep negative territory when the economies are growing at more than 2% a year, inflation should be higher next year ( structural reasons and a positive basis effect from 2017) and ECB QE should phase out in September 2018?

Today in the US the 10 yr is around 2.4% or about 0.7% positive real yield.

In comparison it would a 0.7% increase in yield for the 10 yr bund, just to be at zero real yield.

My point is obviously to show that the elastic is way overstretch in Europe, given growth and inflation current and forecast datas.

This is totally now the result of ECB bond purchases.

We will probably go back in the "never negative yield in Europe" as before 2011 when ECB is done, but in the meantime we could very well adjust to 1% in 10 yr Bunds yield.

Beware of long duration

Beware also because the European credit market has seen at the same time the main indices combine an accumulation of longer duration and lower average credit  (in investment grade indices the share of BBB went from 25% ten years ago to 50% now)!!

In the US the real yield could remain from where they are now (about + 0.7% for the 10yr) up to 1%, which, with growth and inflation expected to pick up in 2018, could bring the 10yr around the 3% territory.

Nevertheless, the elastic is much less starched in the US than in Europe, especially since the 10 yr yield has become higher the the US dividend yield in November 2017, for the first time in more than 10 years,

Which add to attractiveness in case of risk off periods.

In conclusion, for a good hunt, I would rather use a bow completely stretched than a much looser one.

For the second half of 2018 we could well see the spread 10yr US vs 10yr Bunds narrowing in an environment of increasing yields… and increasing real yields.

 

It’s the Debt, stupid!

Excessive debt may well cause the next crisis but it could also be the solution

Photo by  Alice Pasqual  on  Unsplash

Photo by Alice Pasqual on Unsplash

Long term growth is mainly driven by three factors:

1- Demographics

2- productivity gains

3- leverage or debt

The Western World - including the former communist regime - demographics are not very supportive of high growth.

China’s demographics have been supportive of high growth because of a movement of rural populations to suburban areas and taking employment in industries and services.  This has created an artificial rapid growth of new participants in meaningful global growth.  The same goes for many developing countries which have turned to capitalism.  Notwithstanding this in about 15 years China demographics will start to have a negative impact on growth.

Productivity growth over the long term (more than 60 years) is about 2% on a yearly basis, but inflation’s yearly average over the same period is around 3.5%.

Debt has always been and remains the biggest component of growth acceleration. It has been the main factor since the 1980’s in the US and in fact triggered the 2008 crisis.  It has accelerated with all the central banks programs and China’s large use of debt to generate high levels of growth.

Just a few statistics:

  • The global economy is roughly equivalent to USD 100Trn 
  • The size of all global assets and debts is roughly equivalent to USD 500Trn.
  • In 2007 the size of all global assets and debts was roughly USD 350Trn, just before the 2008 crisis.

Scary, isn’t it? … and I haven’t even included the books of derivatives from the large banks.

How does this translate in term of risk?

All this new artificial liquidity has created asset bubbles (real estate, equities, credit) and has kept the rates artificially low in turn driving historically low inflation (mainly by globalisation and deregulation that allowed wages to stay low).  This has resulted in the most formidable movement of wealth concentration in history with massive asset inflation.  Cynically we could say that the profits remain in the private sector and that the debt, losses become public, as was said and done after 2008.

This post is not to discuss the fair or unfair repartition of value added in economies, but to show the risk associated with such global policies.

In that case the main question is how many units of a currency is needed to create one unit of wealth?

Basically, if you need one unit to create one unit, with inflation, demographics and productivity gain you will be fine.  But if you need several units (e.g. almost seven in China) to produce one unit of wealth, the leverage makes any economy extremely fragile to any change in global trade, interest rates hikes and even to changes in consumption patterns.

Now we all know that a system, like the human body, is not at risk of a massive meltdown because of only one problem.

So here is a few:

  • Size of leverage, as mentioned above
  • Speed of money, also mentioned
  • Zombie corporations created with central banks and governments which keep funding State Owned enterprise in China & also plenty of large non-productive corporations in the west (e.g. many banks after the 2008 crisis)
  • Rates kept extremely low by central banks
  • Passive asset management;
  • The Dodd-Frank act that greatly reduced the size of bank’s balance sheet leverage and therefore the size of their exposure to credit, to equities and even government bonds.

I put the Dodd-Frank last because it could be the main element of trigger for a potential meltdown if rates were to go up quickly, if credit spreads widened too quickly or if the economies were to slow down again.  In any case there would be massive bottleneck to sell assets because banks don’t have the capacity to manage large one way flow.

I would add to this that Passive Asset Management, indices or ETF, would, with redemptions, sell good credit with bad and good equities with bad with very limited counterpart firepower.

Seems tough or even impossible to swallow unless central banks again play the QE game. This is hard to imagine, given the current size of central banks balance sheets.

At the moment the main risk, even for central bank’s balance sheets, would be higher rates and inflation that would trigger a domino effect on leverage corporations kept alive thanks to central bank programs.

All the assets mentioned above would suffer quickly and greatly… but let’s not end the party as of yet.  The US is going through the biggest tax reform since Reagan, Europe is slowly getting out of over a decade of extremely slow growth and China is still able to convince us of the validity of its growth.

As we near the end of QE programs we need to ask ourselves where the risk might come from and how best we can manage the risk to our books, or even take advantage of a bubble bursting.

Debt, at the source of many evil, when not used properly, can be a solution when used correctly.

US yield curve, cycle, FED and Pavlov

A reflexive response to the flat yield curve is not necessarily the correct one.

photo credit: pixabay

photo credit: pixabay

Historically, the yield curve tends to reflect where we are in the economic cycle.  A flat yield curve indicates that the central bank has raised short term rates to stop the economy overheating and inflation getting out of control.  However, aren’t we being a bit Pavlovian in trying to equate the current yield curve situation to a traditional text book case? Yes, we are.

Why would this time be different from those textbooks?  I would make three assumptions;

  1. First, the US economy is not overheating.  It is barely growing above trend and the unemployment rate doesn’t reflect the reality of the US labour market where a lot of people have to hold several jobs to make both ends meet. 
  2. The yield curve, 2yr treasury bonds minus 10yr treasury bonds (2y/10y) is currently trading below 60bps (0.6%).  It is the flattest in 10 years. 60bps doesn’t reflect a FED rushing to tighten to prevent overheating.  It can be explained with by factors: a.) the country is slowly coming out of an extraordinary period of Zero Interest Rate Policy (ZIRP); (b.) the short end of the curve -2yr - reflects FED policy to normalise monetary policy when inflation is increasing towards the 2% target and unemployment is around 4%; (c.) the long end -10yr - reflects the ongoing FED activity of bond purchasing.  This continues despite the FED balance sheet reduction and the fact that the other major central banks (ECB and BOJ) are continuing their own QE, ZIRP etc. Given the resulting .02% 10yr Japanese yield and the 0.35% of the 10yr German Bunds the only reasonable option for a flight to quality are 10yr treasuries.
  3. Historically, even if I use words that will make me resemble one of the Pavlovian dogs - except for the drooling that I will try to refrain from - the yield curve indicates danger when it is close to zero or negative.  Even if the recession is mostly lagging a little bit.

Given these three assumptions and the fact that the passing of a good tax reform package could open a new chapter for higher earning for companies and growth for the country, I think that the current position of the yield curve doesn’t mean much and that we could well see a bear steepening from this point, and eventually an acceleration when and if the other central banks start moving out of their respective QE’s.

The current economic cycle is long by historical standards but it’s intensity has been weak with US growth around 2.2% vs something closer to 4% in the nineties. An economy trending around 3%, would definitely unleash old reflexes of 10yr yields back to 3% or above, which given the current yield curve, would keep us relatively stable assuming the FED does hike rates next year.

I tend to think that selling government bonds in US and Europe is the way to guide the duration management of any fixed income portfolio.

 This won’t be a one-way street but levels indicated in previous posts still hold as entry points (2.30% 10yr US; 0.35% for Bunds).

So, in the end let’s try to avoid the Pavlovian drooling over something that looks vaguely familiar. We can do better than that and create new reasons for drooling…

The no Volatility syndrome.

What's on in this low volatility environment?

Photo by  Andrew Draper  on  Unsplash

Photo by Andrew Draper on Unsplash

Global geopolitics are rather messy with tensions building up in the Middle East between Saudi Arabia and Iran, and within Saudi Arabia (but those two events are probably linked). Continued tension between the USA and North Korea,

China and the neighbour countries for the Paracel islands and other coral reefs in the south China sea.  But for markets it is definitely business as usual with absolutely no impact from the rest of the world, even though we could write a much longer list of potential triggers for tensions.  The most important current spice on the markets comes from Washington and the political development of fiscal reform.  There is not much to be added on this topic as of today, compared with the previous posts.

In term of markets the headlines come from the Bitcoins and Ethereums of the world being roughly the only asset creating volatility.  I am not willing, at this point, to commit to the Ponzi scheme aspect or not of these crypto-currencies.  But volatility and markets are what give me the drive to find and help you, to the best of my knowledge, to find good risk adjusted trades and/or investments.

Volatility reached the lowest closing I’ve seen in this century on November 3rd at 9.14%. It is obviously very low and probably doesn’t reflect the risk taken with investing in equity markets, but there are no reason other than an exogenous shock (war, massive earth quake in a developed area, nuclear disaster, etc…) to trigger a volatility change of pace.

The short term is the end of the year with still massive central bank inflows of cash and the most coordinated and increasing global growth in a very long time, how could things be different?.

The pricing of an additional rate increase in December by the FED should not constitute an event to break the current clement economic environment.  Risk assets should continue performing in one of the most complacent and central bank biased environment ever.

Volatility is what makes traders happy to be aggressive in the markets.  Lack of volatility is what make most of other people happy to focus less on risk, in particular the people selling passive strategies.

The main question for us traders is ‘Where can we still make money?’  My opinions;

Rates: 

  • The market doesn’t buy the FED plan to raise rates between three and four times next year, which translates into an extremely flat yield curve.   I would stay short the 2yr-10yr until before the next FOMC and take any opportunity to short the 10yr (below 2.3%).
  • I would also take any opportunity to short the 10yr German bund (through futures) every time it gets below 0.35%, with negative real yield almost at the lowest point ( -1.1% between 10yr yield and inflation), despite very high readings in Europe regarding growth and confidence.

Equities:

  • It is a little bit more tricky because I actually still like equities and I think the current environment favours this asset class.  Tax reform and the two year gift from ECB are definitely boosters for this view.

FX - I like the USD overall with:

  • EURUSD next target around 1.1250
  • USDJPY with a conclusive break above 114.50 (close above)
  • GBPUSD: current strength in USD vs political mess in UK
  • DXY: the break above 94.30 has been confirmed, especially after the pullback from 95.12 back to the breakout area last week.

Trump: the designated looser.. or is he?

Could Trump actually get something done and cause a rise in equity markets?

credit: pixabay.com

credit: pixabay.com

It is almost a year since Donald Trump has been elected president of the United States of America on the platform to change politics, to create jobs, to improve the legal and fiscal framework for companies.On his populist agenda he also said that all of his reforms will improve the middle class standard of living and will fix immigration problems.

One year into the presidency, Mr Trump hasn’t much of a track record to show, except the highest number in history of tweets by a president.  The attempted limitation on immigration has continually been challenge by state judges and repealing Obamacare hasn’t passed due to republican senators voting against.

But we all know that the real Trump’s interest is business and government simplification. If we were more into conspiracy theory we could even imagine that immigration and health reform are pure smoke screens in order to allow him to focus on the business and fiscal part of his mandate… but of course, we are not!

Nevertheless, the awkward, Twitter addicted, loose cannon, uncontrollable Donald Trump is showing some focus and wit on his way to manage the three main pillars of his economic reforms:

  • fiscal reform
  • repatriation
  • infrastructure

If we add to this the simplification angle, the nomination of the next FED chairman, Jay Powell, will add the dovish, Republican and deregulation umbrella to the Trump reform programs

What if, because being an outsider from Washington traditional politics, only Trump is able to pull this out off?  This, as of today, still looks like a long shot, because Trump is doing so many uncontrollable things that make him not even liked by his own party, the GOP.

Nevertheless, it looks like he has a particular focus and wit on the economic aspects of his reforms. His treasury secretary is doing an enormous job to go along the key aspects of the fiscal reform (such as the 20% corporate tax), with no disruptive Tweets.  All said, there is still a long way before checking all the marks of his fiscal reform

But, let’s acknowledge that this reform, if passed in a balanced way (by killing most tax loopholes!) with repatriation and the prospect of infrastructure developments, will really change the medium term growth for the USA.  This means, in term of equity markets the current over-valuation (in term of P/E ratio) might see a serious improvement of the E and clear the way for much more market upside.

You might say that the US markets are up 263% since the through of March 2009, and the valuation extended. Between the end of 1987 and the end of 1999 the US equity were up 627%. If growth prospect go from around 2% to 3.5%, with another few years of loose central bank policies globally, we can redefine the forward parameters to measure equities, but also bonds for the next two to three years. 

In this case, we can be sure of one thing: the boom-bust cycles are not about to end.

Politically, this is where it could become difficult for Trump, because by eventually succeeding with these reforms, he will also have proven that traditional Washington politics was the only reason no one was ever able to go through such simplification before.  Mr Trump could become very dangerous for the very existence of traditional Washington politics.

With a cynical point of view, one might ask the following question: will the Republican let him pass all these reforms before trying to impeach him or will the very survival of their traditional way of doing politics will prevail and they will push hard for his failure?  Trump might be the only one in the US to succeed where many before him have failed, despite being not politically correct and so despicable on many aspect of his personality.

The designated looser could become the unexpected game changer!

Bank of England

Will Carney support New York weekend tourism?

Photo by  Neha Deshmukh  on  Unsplash

Photo by Neha Deshmukh on Unsplash

Just about ten years ago I was "helping" to run a business in London. This was a fun/ stressful time in my life mainly because life in London is incredibly fun and stressful. 

Financially speaking one of my signature memories was the price of cable.  At the time, we had revenue receipts in USD and obviously, expenses (staff, rent, booze and other things) in GBP.  CABLE was at 2.0 for a long painful year 2007-2008.  Gals from Shoreditch were flying to New York for the weekend to do some mattress testing and I suppose a bit of shopping, while firms like ours were freaking out about the expense side of the ledger.

I only bring this up to put things in perspective for today's release.  Yes, the UK is on its knees and seems likely to get kneecapped in this Brexit deal, but from a FX perspective I believe a lot of this has been priced in.  Fair value in STG is surely somewhere between 1.40-1.60.  When this whole episode passes, we will surely move back up that way.

For the short term, we are looking at a few possible trading scenarios today:

  1. Hike with bearish bias 6-3 or 5-4 vote - This will bring serious STG sellers almost immediately.  We target 100 points on 6-3 vote and 150 points 5-4 vote.
  2. Hike with vote 8-1 or 9-0 - Cable will knee jerk higher 60 points then we will see good two-way interest.... not clear if bulls or bears win at the end of day (probably down to Carney's tone).
  3. No hike - oh my - I will call my gal pals from Shoreditch to see how to handle this.

/Privateer

Of Traders and Dinosaurs

Are Traders an endangered species?

Google images

Google images

Once upon a time, about 66 million years back, a meteorite fell in the Gulf of Mexico and created, after a huge explosion, a winter that lasted years.

This spectacular event and a combination of other events brought a tragic conclusion to what we called the era of Dinosaurs.  To what extent humans are around today is due to dinosaurs disappearing remains an ongoing topic.

Traders approach the world in a very cynical, but pragmatic, creative, aggressive, directional and gambling (some will say ‘statistical’) way. Trading, like most of the world industries, started to be active around the end of the 19th century.  As a “specie” they survived many tragic events, such as the 1929 crash, WW2, the oil crisis of the seventies, the 1987 crash, the Dotcom crash of the beginning of the 21st century and even the 2008 crash.

The current - very difficult - environment for Traders is not the next potential bubble exploding but more due to Central banks/ systematic indices investing/ no volatility world.  Traders are hunters of disorder and volatility.

Today the non-trader has evolved, with the help of governments and central banks, to trust the machines more and more and to transform the investment industry into an oligopoly of groups using mainly technology to create standard portfolios, to sell them, and even to squeeze, micro profits out of every single allocation or automatic trade from client robots.  As you can see the world  as described here doesn’t need and doesn’t want volatility, disorder or chaos hunters. These politically incorrect monsters...... they are a thing of the past.

Robots, automatic investing, AI generated asset management, allows us to completely put no emotion at all into investing. Humans tend to become lazy, so if they have the possibility to have someone else or something else do the hard work this is the path they will follow. The world is now where most of managed assets go to passive &/ systematic management. To manage these assets, the robots, more or less do just about the same things.  There is a limited amount of investment philosophies, but the only difference is that robots can do it much faster that any man.

Front running from banks and investment houses of the past has been replace by robots able to generate huge profit, thanks to billions of micro trades on the back of the clients!  Cynicism is still very much present when the technological arm races allows some players to get a trade done a millisecond before de crowd.  The only difference is that banks and financial institutions don’t run large books of assets for market making purpose anymore. 

And so-what?, you might say.

How do you manage flocks of clients who want to exit positions? How do you manage flocks of retirees who want access to their investments for spending?  Central banks have been - for the last decade - the garbage collectors of last resort, creating globally armies of zombie companies surviving on cheap credit, creating debt generated slow growth (& a lot of debt!).  These robots, much faster and probably much smarter than we are, have only been the toys of people who refuse to face reality, of destructive creation, of Darwinism, by creation a potentially devastating system - system that used to be regulated by volatility, chaos and disorders hunters: the traders. We can’t say no more… but much less in proportion.

The world needs predators to self-regulate. Traders have been called these kind of predatory names, but they have helped regulate the global economy by aggressively attacking bubbles when they started them or self-destructing when they couldn’t.

The End Game for the current financial and economic world is very scary because we (Traders) gave our survival instinct to central banks and politicians to regulate our stress and we gave most of the world investment to passive or automatic systems.

Worst of all we now lack the predators to regulate the populations.

I don’t know if and when the Trader population will be extinct, but I know that if the financial world uses too many political and financial shortcuts, the rest of the politically correct and "submitted" population is creating favourable conditions to self-destruct the planet itself, not even including the possibility of a meteorite.

By gold… and an atomic fallout shelter!!

Macy's; where Contrarian meets Value and Technician

The market is overly pessimistic on Macy's

credit: pixabay.com

credit: pixabay.com

Digging through the hated sector of retail, we think Macy's presents a compelling risk reward.

  • 73% off its all-time highs 
  • Short float (now 15%) has tripled since May 15th. 10% of the short shares were sold between $24-$20 … I don't need to go over the "AMZN will take over the world" and the end of Nricks & Mortar retail rhetoric, you get the picture - looks very crowded.
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  • Margin of safety. Fundamentally Macy’s owns enough real estate (whether you value at 10 or 20B) not to cause concern over its heavy debt load, sufficient cash flow to cover its dividend and Fwd P/E at 7.5. all make for a decent margin of safety.
  • Div yield of 7.5% @$20 in particular we think is very supportive of PPS
  • Macy’s pays a 36% tax rate. It would be a prime beneficiary of any tax cut coming from DC
  • Sentiment could turn quickly and quite a few could be caught on the wrong side of this trade
  • @20.00 we're making the bet that we're putting in a double bottom and that shorts are going to experience pain soon. Notice the gap bellow which 2/3 of them are short. 
TradingView.com

TradingView.com

/Privateer