In the Summer of 2012 when “Financial Repression” was all the rage, I appeared on SOTS with Rick and Ira. They both advocated clinging to low (record) yielding bonds. I suggested that Financial Repression was a choice and after a 35 year run, buy anything else.
Last Summer, we held a conference call for Contrarian Corner Members that centered on the significance of the Spring Bond Rout. We believed the event was a significant signal and although some rates- especially those implied by Eurodollars – where too high, a bounce should be seen as exit. Eurodollars (and 12 month LIBOR sets) proceeded to make new life of contract highs (lows) without Treasury yield confirmation. Our friend and guest contributor, Guillermo Roditi mentioned at the time that the Fed had essentially bought up all the remaining” negative convexity duration death star” notes so the next move – if/when it came- would be more orderly. CS mortgage giant Harley Bassman penned a missive today highlighting these facts.
We see 2014 as year 1 A.H….After Halt. Taper will wind up an insignificant fad on the dust heap of monetary history. We are going to find out if the real cost of the Fed’s programs has been the exit of all other relevant players from the system. QE turned out to be an attenuated war of attrition on free markets and price discovery. Now, at long last, the one big clumsy actor in the room is leaving. We say, “Don’t let the FAFRRRF hit you on the way out.”
Hooper tagged a move down on SP Future today after Europe went into a tailspin. Interestingly, we have received several gloomy emails from the brokerage community since. I’m more inclined to believe the harsh realization that LSAP-4-Eva is going bye-bye and the equity market mark up needs a pause.
We posted a couple months ago that the Death Star was quietly being used to inch the base rate up. Strictly technical, of course, and nothing to see here but low and behold BBG finally picked up on it and the “floor” has moved from negative/zero to 10-12bp. The Yellen Fed was conceived in Dovishness but will be dominated with nasty little bits of LESS.
We all saw 2 years ago that the Euros can ruin a weak expansion quickly. We still view this as a necessary tremor on our way out of QE-land.
Silver, Gold, Yen and Mini Dow all hit downside Model objectives generating new risk window patterns tonight. The news media is connecting those moves to the shopping situation but the connection is thin at best.
Treasuries slipped a tad and are triggering some selling. The contract roll and curve shape are adding support.
The Treasury Complex has rolled into March with all the usual gaps and distortions. We believe the market is too high in spite of the rolls. Grey Thursday, Black Friday and Small Store Saturday are just the 3 shells in an over-hyped game of “Just buy something dammit.” What transpired at various retailers looked more like looting than shopping to us. The disgusting corruption of the nation’s best holiday will end up an embarrassing fad soon- we hope. The economic ripples are not meaningful in our view.
Away from cracking a flat screen over a lady’s head at Wal-Mart and another new objective hit on Hooper’s equity indexes, we think a heartbeat has been heard in credit land. The 10 year is in the trap gap and my own personal favorite “short-to-be” is the 5. (We will wait for Hooper’s ok) Then (if/when) I have one word for the Season……SELL !
The Wall Street Journal prints 2 incredible Thanksgiving op-eds today. I’ve had my children read them at Thanksgiving Dinner since they were old enough to read. Take the time to check them out. Yesterday, I took a call from a reporter who was desperate to post a story on impending corporate bond market gloom. I just didn’t see it.
The economy is quickening a bit but I’m sure the new year will usher in some buyer’s remorse. We still see rates moving up. What happened last Spring was a warning shot not a mistake. Someday, markets will decline,it won’t have to be a crisis but the machine will hype it as one.
Take a time out from the silly “Black Friday” sales “reports’ and soak up the Thanksgiving Spirit. There will be a crisis in the future. By definition, the vast majority will not see it coming. Until then, too many are missing the period when “things kinda sorta worked out.”
We are in the Napa Valley after a harrowing excursion across the country and through the Donner Pass. The vast beauty of the US is shockingly impressive. Huge swaths of its citizens go about their lives far from the vacillations of a 5 minute Spoo chart and opinion dominated “business television”.
The story seems stuck in “Tapering” mode. Renewed speculation over a cut in IOER failed to include the introduction of the Death Star rate. I would venture a guess (possibly distorted by a morning tending the garden at The French Laundry gik) that the Nation has already moved on. The word that stuck out in reports I bothered to read was HALT not taper.
We are scouting locations for our West Coast operation. There is still a lot of hurt in the middle of the country and immense wealth up here. The Continental Divide is geographic and monetary. LSAPs make it worse.
Your ballroom days are over, baby. Jim Morrison
Late Friday afternoon, the Wall Street Journal broke a story on CME Group that should have everyone nervous. Hackers, believed to be Chinese, compromised the CME security system. The successful attack took place in July amid the worst Bond rout in years and went unreported until Nov.15.
The top 2 Tommy (deaf, dumb and blind) regulators at CFTC, Gensler and Chilton, had already slipped out unscathed. The NFA? Please, have you ever dealt with them? Peregrine, MFGlobal, LIBOR and many smaller others couldn’t get a head to roll. The only common characteristic of the scandals is that they have to blow up to catch the eye of the regulators. The exchange was quick to dis-intermediate the brokerage community but failed to pick up the fiduciary responsibilities. The even deeper scary truth is the internet wasn’t built for this.
The now common, Stop Logic or Velocity Logic Events are just the latest smoke and mirror play by the exchange and its gaggle of spoofing, front running, rebate receiving, revenue sharing, close banging “friends,” Products from Gold to Bonds are “halted” for anywhere from 5 to 20 seconds whenever they “get loose” as we traders call it. Why? What’s the reasoning? More importantly, what’s really happening? We call it a Robot Gang Bang but no one should think it’s funny. Seems to me this has gotten away from “them”-the exchanges, the regulators, the geeks and the quants. I get the creepy feeling executive suite meetings are stuffed with corporate team players and no one has the guts to admit they don’t know what the hell is going on.
Jeff Koons’ Balloon Dog (orange) sold last night for a living artist record $58,450,000. A former commodity trading wiz, Koons rarely leaves his viewers without opinion. Balloon Dog is one of a set of 5 different colored 15 foot sculptures of the every child’s favorite clown/magician/uncle’s surprise gift. A classic Koons theme in jaw dropping technical delivery. Insider trading crook Steven A. Cohen owns one.
The work, its price and one of its owners is a metaphor for the QE world we live in. The cult of celebrity and the lack of gravitas blur with the significant. Like Twitter, like America, Balloon Dog is at once totally vapid and totally awesome. Most importantly, its price is going up; therefore, it is good. The art market and its bubbiliciousness is often held out as a signal of the excess and hubris stage of the cycle. I don’t see it turning, yet.
“….Where are we today? The Fed keeps buying roughly $85 billion in bonds a month, chronically delaying so much as a minor QE taper. Over five years, its bond purchases have come to more than $4 trillion. Amazingly, in a supposedly free-market nation, QE has become the largest financial-markets intervention by any government in world history.“ -Andrew Huszar Sr. Fellow Rutgers Bus. School/Former Fed MBS Buyer/Former Morgan Stanley M.D.
More rational voices are emerging that Large Scale Asset Purchases are no longer effective or safe (cost/benefit wise). Forward Guidance, a wonky way of reenforcing the gravitational pull of ZIRP, will be taking over the lead policy role. It may be strong enough to tether rates but will prove anemic from a growth standpoint without Fiscal adjustments to incentivize the demand side of money. “ZIRP 4 Ever” was a snarky rallying cry in 2009 but a hash reality today. A base rate at zero was an “extraordinary” measure when first introduced. The Yellen Fed wants you to believe the policy is both “ordinary” and “effective.”
Where are we today? Lost.
Last week’s adjustment to the forward term structure was significant on both a cyclical and secular time frame. The devastation of the Spring and Summer to the 30+ year secular Bond Bull was a watershed event. The 100bp correction since the Shutdown is the second chance participants tend to fail to recognize as such.
Front Eurodollar contracts made new Life of Contract (Historical) highs (low implied yield) while deferred contracts – despite heavy doses of Forward Guidance – have failed below the late April peaks. This is a classic non-confirmation. Optimal Control Models and Forward Guidance are faced with a new dilemma, Mr Market is doesn’t wait.
The best examples of the term adjustment are seen in the EDU14 and EDU15 (or EDU16) weekly charts. On a Cycle basis, the change is aligned with the recent cluster of better than expected data points. On a Secular front, the March 2012 to March 2013 “yield grab” seems to mark the point in time when, after 30 years of denial, participants finally threw up their hands and reached.
We continue to believe that the fashion in which rates adjust upward is/will be more important than the reality that they are. Funding pressure and “financial stress” metrics jumped into June far quicker than tolerable. The collateral based regulatory System 2.0 may turn out to be far more inelastic than the non-securitized money system of old. Optimal Control or not, we think we’re finally going to go find out.