Author Archives: Kevin


After shooting well through the downside objective on the daily pattern yesterday--- Today's high is the exact Hooper sell point on the Weekly pattern.

It id interesting that for all the back and forth--the SP future has been moving sideways in a broad pattern since November. Tops tend to be long drawn out affairs. A sideways move from a lower level, and a narrower range is not uncommon during a monetary policy adjustment (hard to call it a tightening) like the Fed is outlining.


The Competitive Devaluation of a Meme

Today, in the most telegraphed CB move in history, the ECB outlined a 60B/m NCB bond buying program. The pending action quickly morphed into television and social media labeling of a "Competitive devaluation of the currencies." Say WHAT?

The topic could be expected by book selling "Quasi-conomists" and yellow metal hugging Chicken Little's, but even "veteran" currency anchor Sarah Eisen promulgated the myth. "Currency Wars" retweeted through "finance Twitter all day. That the most significant recent global Fiat event was last week's crash UP re-pricing in the Swiss Franc mattered not to the accepted theme.( A  policy of artificially lowering the Franc's value was aborted. ) If a 24 cent jump in the your currency is a competitive "devaluation", then we're in bigger trouble than I thought.

I could not help but wonder at the tons of luxury leather boots Italy would be dumping on Spain ! Except they won't be. Because, contrary to the phoned in pseudo-analysis of the day - There is Not a competitive currency devaluation going on. As for ECB QE, I'm lost to if it will help Europe. As I said to Lorcan Roche Kelly (who knows far more than me on this), since National CBs do the bidding it looks like PIK (payment in kind) bond buying to me. I am a tad nervous that such an obviously flawed narrative as "Currency Wars" goes unchallenged, however. Also, the Fed is still poised to attempt a dismount with a much higher difficulty factor than the ECB's highwire into LSAP. In fact, no one has ever "landed" it.

Several years ago,  @Fullcarry and I wondered what America would think of "looking like Japan." Contrary to the assumed slight, we focused on America's reaction to relatively low unemployment, a couple points of GDP growth and nary a glimpse of inflation. I guess the answer is totally confused and completely unacceptable.

The Trouble With Openness

Way back in 1996, when I contributed some of my radical notions to a mentor's bi-weekly called Grant's Interest Rate Observer, Jim wrote a wonderful book titled The Trouble with Prosperity (A Contrarian's guide to Boom, Bust and Speculation.) I would be fibbing if I didn't say that the book influenced me deeply. Jim and I don't talk much anymore but its a perfect day to acknowledge his spot on call last Autumn on the "white-flagging" by the SNB. Jim suggested buying 6 month option protection on a rising "Swissie" for cents on the dollar. For those not "ISDA members with a TBTF bank relationship" he liked - as is his thing - buying gold.

For delusional, older, semi-bitter futures traders, like moi, today's SNB action (and the probable action of Jan 22 at the ECB) is another glaring example of the Failure of Openness when implementing monetary policy. Today is a Euro-cross trader's Oct 15. Market participants are merely making logical large scale bets on the openly broadcast narrative of their respective CB. in the glory days gone by, a large Hedgie (say Soros) might have hastened the surrender with a brazen bet. No longer. Color coded Eurodollar players spent months last Summer adjusting to the Fed's nudging only to see the positioning "Crash up" in their collective gaping maws. Euro-crossers, verbally green-lighted by the powers that be, loaded up on inter-governmental sanctioned competitive monetary hot potato. And today? BOOM

Our suggestion has been, remains and hopes to become the abandonment of CB openness around the globe. Could this be the first step back to the old way? Maybe, doubtful. I still recall the dismissive look Andrew Ross Sorkin gave me during a commercial break when I voiced this opinion several years ago. The Fed Watching Community has not been thinned by the CBs statements and pressers. An army of reporters are at the ready to tell us what we've just been informed of. And yet....the losses and position blow ups continue to mount.

The diluted efficacy of policy action remains our biggest critique of "Openness." "Surprise and Do More" is "Shock and Awe" for central banking. The SNB stepped back in that direction today. We constantly remind our customers- "No one has EVER exited." Take heart in the notion - at least for now - that the Fed is still handing $!00B/quarter to the Treasury Dept. The red P/L at the SNB led to waving the white flag today.

Monday Musings

1. The US deficit, according to CBO estimates, declined from $1.4 trillion in 2009 to $506 billion in fiscal year 2014 and is projected to be even a bit lower in 2015. The change is nearly 1/3 of the Fed Balance Sheet and issuance cuts are an under stated part of the bond market "love in." The Parkhurst Corollary comes through again.  At the peak of the deficit/government spending hysteria I went on CNBC's Squawk Box and introduced the world to my mentor's teachings. The PC states- as readers here have heard before- "Economic knowledge is inversely proportional to concern for US public debt." As Bob Rubin pointed out to James Carville when bond vigilantes were still a thing- All you need to do is turn the trend and the economy will do the rest. The decrease in the rate of increase has been remarkable given the moderate pace of expansion. Imagine the impact if acceptance of our other Theory, that we are in a Structural not Liquidity, Trap had been addressed.

2. The Employment release failed to produce a linear day in bond futures. The 3 days to start the year and following concession absorbed most of the potential energy. Players moved into the Reds after several days of solid performance from 5s. I would watch this space closely as it is a battleground for the potential policy friction between the Fed and the ECB. The 2nd half of 2016 is roughly 1.5% and near the recent price high of the stability range. The Fed can reverse engineer a scenario: How do we get there, from here?

Banner Headlines

The banner headline of today's WSJ read: Nervous Investors Flee to Treasuries. What it should have said was: Stocks Went Down and Bonds Went Up..Yesterday

As we have suggested before, the continuing common mistake of the financial media is to imbue meaning into the noisy ripples of the post-credit super cycle, post-QE markets. If only a single "nervous investor" could have been dragged out in front of the cameras to verify the hyperbolic headline claim. Alas, none were to be found. Treasury prices rose, equity prices fell..we want to believe the action must be connected and an omen of something. Until today, when another false narrative went to the bone-yard. Its as if we are collectively Leonard in Chis Nolan's brilliant Memento, a society with anterograde amnesia, unable to store short term memories.

Are we to believe that a good night's sleep not only calmed the shaking masses but fortified them with a glowing vision of the future? Hardly. The market moved, Taylor Swift fell down. 17 Trillion dollar economies don't vibrate so easily, only their capital markets do. The sticky misunderstanding of the debt markets is the concept of catching capital flight. Look around the world, bond market exodus is a precursor to nearly every significant economic calamity. Yet, here at home, bond buyers and TLT cheerleaders allegedly strap themselves to the "Duration Masthead" at the slightest indication of stormy seas. I can't put it any more simply: It just isn't so.

The Employment Report will print tomorrow. Jobs will be added. Markets will move. Stories will be spun. The Fed, in the greatest feat of all, will remain both- in front of and behind- "the curve." Now, where am I? Who's Sammy Jankus?

China – The Parallax View

Parallax is the apparent shift in the position of an object due to the observer's vantage point. This New Year's Eve, our New Year, Chinese revelers stampeded in Chen Yi Square, outside The Peace Hotel, in a public park area called The Bund. 36 people have died and hundreds are injured.

The local Chinese community (read: new wealthy) are blaming the stampede on city officials unprepared for the massive crowd and, more importantly, the huge migrant worker population. Over 4.5 million Chinese are believed to be rural migrants moving about the city. How you gonna keep 'em down on the farm, now that they've seen Shanghai? Class separation is widening in the Land of the Little Red Book.

The interesting, yet not confirmed, aspect of the carnage was that it started when bags of what appeared to be US Dollar bills were thrown form building windows. I don't see skies of floating Renminbi even causing Taylor Swift to miss a lip-sync if dumped over Times Square. We see a shift coming to China in 2015. The well documented credit charade and physical wealth storage problems will be ancillary events. The Chinese disruption will take place in the Streets.

Abby Normal

We've heard a lot over the last few years about the "New Normal" and the concept of structurally embedded slower growth. We've viewed the post crisis post credit super cycle adjustment in a different way. To us, the path, though twisty, is just "Back to normal." Far too many have calibrated their expectations to the credit super cycle apex; an exiting period in financial history almost impossible to recreate.

Today's GDP report solidifies the long slog back toward normal. The expansion, heavily criticized, is now of average duration and oomph. The 30 year mean reversion in rates is complete. The MARKET is already adjusting to the reality. As we pointed out 2 weeks ago, 12 month money (1s) and 2 year yields have steadily and stealthily climbed while everyone focused on the long stuff. Long rates, however, are like the Moon not he Sun; they are reflected light.

We are entering the phase when the pundocricy will stretch their narrative to "Its good that the Fed is /going to raise rates." There is still a serious gap to fill on the way back to normal, the old normal, the normal normal, the normal before the credit orgy. The 5 year note yield plus some fudge for inflation should track Real GDP. As of this morning (depending on your fudge factor), that gap is a massive 2.5%. My sense is the Happy Days of bullish curve flattening are ending.

One more thing about normal time...people get hurt.

She Meant What She Said

The Fed set out on its "Openness" Journey in 1999 with the ascension of Roger Ferguson to Vice-Chair. Greenspan's persona of global central banker to the stars and "man who saved the world" over shadowed the great work and good intentions of Ferguson. After decades in seclusion (and popular books like Secrets of the Temple), Ferguson was charged with opening and clarifying Fed communication and transparency. After Sept 11, he compiled what is essentially the Central Bankers Handbook - The International Journal on Central Banking. Although several "appendix" have been added in the post-crisis era, many Bernanke detractors would have been better served if they read instruction guide earlier.

My objections to the Ferguson Agenda have been well documented in this space. I believe openness reduces policy efficacy. Ironically, a St Louis Fed white paper of the mid-90s leaned against openness also. The paper concluded that policy  levied in "surprise" fashion and of greater degree than market pricing was the most effective at achieving desired economic outcomes. The summary was "Do more and do it when they don't expect it."

Back in my day, when dinosaurs roamed and trading was conducted by hand signals in pits, certain wise men were given the task of tea leaf reading Fed activity. They were called Fed Watchers. Oddly, as the Fed has increasingly educated any and all who are willing to listen as to there views and operational actions, a cottage industry of re-explaining has boomed. Yesterday's statement and presser - THEY EVEN DO PRESS CONFERENCES ! - lit up the industry once again. The gist of what I've read goes something like this - with decoder ring :    1)     "The statement was "clumsy"- meaning? The statement did not read as I would have written it.

2) "Patient is 2 meetings but Considerable Time is 6 months" meaning? I'm making things up that jive with the readily available prices in STIR strips.

3) It was "Hawkish/Dovish" meaning? Insert adjective that aligns with my/firms position in equity/FI/commodities. OR, allows me to continue ranting about the Fed.

Here's what I think - She meant what she said. Stop worrying about the Fed. Keep watching the term structure between 1 and 5 years, it'll tell you everything its telling the Fed. The long end was clearly trying to "Go it alone" and that rarely works out.

Happy Holidays from Joe, Hooper and me.

Who Drank My Milkshake?

As the Ex-Post "Splain-a-thon" on falling oil prices goes full bubble, I thought I'd throw my 2 cents of kerosene on the bonfire of the positions. I'll do a quick rehash of some of our prior themes: Too much everything, yada yada, quantitative easing elasticizes economic relationships, yada, stocks vs flows.

The desire to link market price movements to economic general theory remains strong in most analysis. I find it odd since the vast majority of participants worship at the House of Charts. For the most part, you can copy and paste "Product X" on the chart and skip the heavy macro lifting. In a quantitative world, things move abruptly and extremely. Markets are driven by liquidation and failed belief systems.

The consistent, rolling belief system of the Quantitative Regime World has been the idea of impending inflation. Equity, debt, energy, fiat and "stuff" have all been periodically paraded in front of the masses as the next indication, or victim of the CB folly into QE. One by one, they have been systematically taken to the basement bowling alley and clubbed to death (confused readers please watch There Will Be Blood).

As Ray Dalio pointed out today at the Dealb%k Confab, he remains focused on the machinery of the financial transmission system. Although still constructive, he sees the efficacy of monetary monkey business waning. (Where have I heard that?) When the next stimulus demand is made by Mr. Market, a fiscal hand will be needed to make an economic clap. The Debt Truthers will most likely go ballistic.

Chatting with Mark Dow today, we found it odd that Fed watchers still focused on the timing of alleged FF hikes and statement phrase tweaking but not the possibility of balance sheet re-investment abatement ("shadow tapering"?) Until then, I remain happily aligned with the agnostics.