Traditionally, every time 10Y US Treasury Yields have jumped solidly above the 3% level – as they have in recent days – Emerging Markets were among the first casualties. But not this time, in fact quite the opposite as developing-nation stocks climbed for the fifth time in six days and the lira and rand led a rally in currencies.
Average spreads on emerging-market dollar and local currency bonds narrowed too. As the chart below shows, the largest ETF tracking emerging-market local currency bonds – the $6.1 billion JP Morgan JEML ETF – saw $169 million in inflows, the most since June 2017, after losing about a quarter of total assets since early April according to Bloomberg.
The inflows suggest that developing markets may finally be turning the corner after the worst slide in EMs since the financial crisis, as a result of a stronger dollar and global trade war.
Bizarrely, the rebound in sentiment has taken place against a backdrop of deteriorating China-U.S. trade tensions, and may encourage those seeing an end to a sell-off that’s hammered asset prices from Indonesia to Turkey and Argentina during a tumultuous past five months. The EM price gains have also given strength to the bout of optimism triggered last week by interest-rate decisions in Turkey and Russia that were more hawkish than many anticipated.
EM optimism appears to be contagious among analysts: quoted by Bloomberg, Bernd Berg, a strategist at Woodman Asset Management in Zug, Switzerland said that “currencies have found a bottom for now and the tactical rally might have some room to extend further as emerging-market central banks have come to the rescue with rate hikes,” said “Overall fundamentals are still solid and valuations are cheap in some emerging-market foreign exchange after the aggressive repricing this summer.”
Franklin Templeton’s Chris Siniakov and Goldman Sachs Asset Management’s Philip Moffitt are among those who also say the declines in emerging markets are starting to ease.
The world’s largest asset manager, BlackRock also said this week that emerging-market debt offers a “very good entry point” for investors, citing a tentative peak in the greenback and easing idiosyncratic risks.
The shift in mood has certainly spooked the EM shorts, who have materially covered their positions, a clear sign that the pessimism in emerging markets is starting to wane.
Furthermore, the correlation between emerging-market bonds and Treasuries is at the lowest in two years, which explains why U.S. yields above 3% aren’t an obstacle – for now – to developing-nation foreign debt as long as the dollar stays in check.
According to Bloomberg, the declining influence of Treasury yields may suggest that emerging markets are adjusting to the end of easy money and are focusing on threats to global trade as the main risk. Investors, however, who have been badly burned on the asset class, will be looking for more signs that the dollar has peaked before diving deep into valuations they maintain are too cheap to ignore.
Indeed, one reason why higher yields are being ignored may be that the strong dollar – which traditionally rises alongside yields, and is seen as an even greater nemesis to emerging markets – has slumped to the lowest level since the end of August.
Not everyone is bullish though: State Street is among those betting that the bearish trend has room to run. The firm is “pretty cautious” on emerging markets in the short term because of trade tensions, said Lori Heinel, deputy global chief investment officer.
But SocGen’s FX veteran Kit Juckes best summarized the renewed general apathy to all market risks: “Where we are today, is in a period of relative calm as U.S. bond yields probe their highs, and we become accustomed to trade rhetoric and perhaps, blasé about the economic damage it will cause.”
The Department of Justice on Wednesday said it would look into allegations of “misuse of government resources to advance personal interests” after James O’Keefe’s Project Veritas released a second video this week exposing “deep state” federal employees pursuing socialist agendas while on the clock at their government jobs.
In the latest undercover video, DOJ paralegal and Democratic Socialists of America member, Allison Hrabar, reveals that there is “a lot of talk about how we can, like, resist from the inside.” She discusses a fellow DSA member working from within the Department of Agriculture who is “slowing down” the process by which people are eliminated from the food stamp program.
PV Journalist: “…she mailed it to you in like physical snail mail like post office and then you like got it. That’s like awesome.”
Schubel: “Yeah. It’s kind of like the Nixon, “deep throat” type of thing.”
“We have a member who works for the people who distribute food stamps, and they can, like, take that away, and they’re slowing what they do… What they’re doing means that people are going to be able to stay on food stamps for another month or two, which is, like, really important,” Hrabar said.
DEVELOPING: Statement from DOJ on today’s vid: “These allegations are deeply concerning. Department policy prohibits misuse of government resources to advance personal interests. We are looking into this immediately and have referred this matter to the Inspector General as well.” pic.twitter.com/cb6x1g8tu6
Hrabar also appears to use her DOJ work computer to research DSA political targets – including looking up the license plate of a lobbyist in order to organize a protest outside his home.
In another portion of the video, Jessica Schubel – former Chief of Staff for the Centers for Medicare and Medicaid Services under teh Obama administration says that there is “like, a little resistance movement” within the government. Schubel also states that she received confidential information from a friend at the Department of Heath and Human Services.
In response to the Veritas videos, a DOJ spokesperson said: “These allegations are deeply concerning. Department policy prohibits misuse of government resources to advance personal interests. We are looking into this immediately and have referred this matter to the Inspector General as well.”
According to a recent Reuters/Ipsos survey, 70 percent of Americans, including about 50 percent of Republicans, support Medicare for all, the latest incarnation of single-payer health care. Republican support for a health plan labeled “Medicare for all” is not surprising considering that Republican politicians support Medicare and that one of their attacks on Obamacare was that it would harm the program. Furthermore, the biggest expansion of Medicare since its creation – the Part D prescription drug program – occurred under a conservative president working with a conservative Congress.
Conservative Republicans do propose reforming Medicare to reduce its costs, but their proposals are always framed as “saving Medicare,” and most reform plans increase spending. Few conservative Republicans would dare advocate allowing young people to opt out of paying Medicare taxes in exchange for agreeing to forgo Medicare benefits.
Many conservative Republicans favor other government interventions into health care, including many features of Obamacare. In fact, Obamacare’s individual mandate originated as a conservative proposal and was once championed by many leading Republicans. Many other Republicans simply lack the courage to repeal Obamacare, so they say they only want to repeal the “unpopular” parts of the law. It would not be surprising if we soon heard conservatives and Republican politicians talk about defending Obamacare from supporters of socialized medicine.
The same dynamic at work in health care is at work in other areas. For example, the same conservative administration and Congress that created Medicare Part D also dramatically expanded federal control of education with “No Child Left Behind.” Conservative Republicans who (rightly) fight against deficit spending when a Democrat sits in the White House decide that “deficits don’t matter” when the president has an “R” next to his name.
Many Republican politicians – and even conservative intellectuals – will say they are being pragmatic by not fighting progressives on first principles, but instead limiting the damage done by the welfare state. The problem with this line is that, by accepting the premise that government can and should solve all of life’s problems, conservatives and Republicans will inevitably get into a “bidding war” with progressives and Democrats. The only way Republicans can then win is to join Democrats in continually increasing spending and creating new programs. This is why the so-called “conservative welfare state” ends up as bloated and expansive as the progressive welfare state. Refusing to question the premises of the welfarists and socialists is not a pragmatic way to advance liberty.
While progressives blame social crises on the free market, Republicans and conservatives are unwilling to admit the problems were caused by prior government interventions. Thus the passage of Dodd-Frank was aided by claims that the housing bubble was created by deregulation, while Obamacare’s passage benefited from widespread misconception that America had a free-market health care system prior to 2010.
Until a popular intellectual movement arises that is able and willing to challenge the premises of Keynesianism, welfarism, and democratic socialism, while putting forth a positive vision of a free society, government will continue to expand.
Fortunately, such a movement exists and is growing as more Americans – particularly young Americans – are studying the ideas of Liberty and working to spread those ideas. If the new liberty movement grows and stays true to its principles, it will be able to defeat the socialists of all parties, including those who call themselves conservative.
Retail workers who are pushing for higher wages better take notice: Amazon preparing to put their bosses out of business.
Roughly nine months after opening its first Amazon Go store in Seattle, Amazon announced on Wednesday that it is planning a massive expansion of the franchise. The company has been notoriously tight-lipped about Amazon Go since it first started offering tours of its prototype Seattle location to select journalists back in 2017. After opening its third cashierless Amazon Go location in Chicago earlier this year, and is planning to open six more locations by the end of this year, before eventually scaling up to 3,000 locations by the end of 2021. If Amazon succeeds, Go will become the largest convenience store chain in the US,per Bloomberg.
So far, most of the extant Amazon Go locations offer only a small selection comprising mostly salads, sandwiches and snacks.
An Amazon spokeswoman declined to comment. The company unveiled its first cashierless store near its headquarters in Seattle in 2016 and has since announced two additional sites in Seattle and one in Chicago. Two of the new stores offer only a limited selection of salads, sandwiches and snacks, showing that Amazon is experimenting with the concept simply as a meal-on-the-run option. Two other stores, including the original AmazonGo, also have a small selection of groceries, making it more akin to a convenience store.
But as the company ramps up the logistical back-bone necessary to support the chain, it ultimately hopes to conquer the fast-casual market in dense urban areas where wealthy professionals who might be willing to spend a little more on a salad or a sandwich typically proliferate. Ultimately, the company hopes to compete by eliminate meal-time congestion with its grab-and-go automation. The initial market reaction to the news was muted, though shareholders probably aren’t thrilled about the massive capital investment that will eat away at operating profits.
Chief Executive Officer Jeff Bezos sees eliminating meal-time logjams in busy cities as the best way for Amazon to reinvent the brick-and-mortar shopping experience, where most spending still occurs. But he’s still experimenting with the best format: a convenience store that sells fresh prepared foods as well as a limited grocery selection similar to 7-Eleven franchises, or a place to simply pick up a quick bite to eat for people in a rush, similar to the U.K.-based chain Pret a Manger, one of the people said.
Shoppers use a smartphone app to enter the store. Once they scan their phones at a turnstile, they can grab what they want from a range of salads, sandwiches, drinks and snacks — and then walk out without stopping at a cash register. Sensors and computer-vision technology detect what shoppers take and bills them automatically, eliminating checkout lines.
One potential obstacle to expanding the chain is the high cost of opening each location due to the sensors and AI technology necessary to support its automatic-checkout system. The company’s other physical stores include about 20 bookstores and Whole Foods, which it bought last year.
The challenge to Amazon’s plan is the high cost of opening each location. The original AmazonGo in downtown Seattle required more than $1 million in hardware alone, according to a person familiar with the matter. Narrowing the focus to prepared food-to-go would reduce the upfront cost of opening each store, because it would require fewer cameras and sensors. Prepared foods also have wider profit margins than groceries, which would help decrease the time it takes for the stores to become profitable.
Amazon no doubt sees an opportunity to profit by grabbing a slice of the $233 billion convenience store market. After eating the initial capital expenditure, Amazon will easily be able to compete on operating costs. But to thrive in such a competitive market, location will be key, according to several analysts.
AmazonGo will be more of a threat to fast-casual restaurants if it is targeting cities, said Jeff, vice president of NACS. Shoppers rate location and a lack of lines as the most important factors when shopping for convenience, he said.
“AmazonGo already has no lines,” Lenard said. “The key to success will be convenient locations. If it’s a quarter mile from where people are walking and biking, the novelty of the technology won’t matter. It’s too far away.”
One unintended consequence of Amazon’s expansion could be a worsening row with President Trump, as Amazon Go could eliminate some of the food-service and retail jobs that have been among the fastest-growing sub-sectors of the US labor market. This could threaten the robust employment gains that President Trump has cited as evidence of his presidency’s success. And Trump has lashed out at Amazon in the past for being a job-killer. And the FTC has been quietly hiring staffers who are looking into how the agency can bring an anti-trust case against tech giants like Amazon.
Going forward, we imagine investors will be on the lookout for signs that this expansion could be the final antagonism that finally provokes the government to take action against Bezos before Amazon truly does become “the Everything Store”.
Universa Investments LP founder, Mark Spitznagel, discusses the lessons learned from the 2008 financial crisis, warning Bloomberg’s Erik Schatzker that the current stock market exuberance is “sandbagging” investors again, just like it did in previous crises, but reminds that while “monetary intervention is a Faustian bargain,” everyone knows you can’t fight the Fed,
“…you mustn’t fight the Fed. What you must try to do is sort of jiu-jitsu the Fed. You need to sort of use the Fed’s force against it.”
Erik Schatzker: What do you think of as the most important lessons of the 2008 financial crisis?
Mark Spitznagel: Well, I think what it taught us ultimately is that interventionism, monetary interventionism, is a Faustian bargain. It gives us short term gains, and with that comes longer term pains. I think we saw that previous to the last crisis, and I think we’re going through the same process now. What we end up having is a market that is just very good at sandbagging us. It makes us feel for a long time like we’re smart, like we all have an edge – which of course is impossible, we can’t all have an edge – and then, once we’ve up our bets, it shows us its real properties.
Erik: Universa, your firm, and you by extension, wouldn’t have a business if there were no financial crises. But as a matter of principle, are corrections, crashes, market meltdowns an inevitable, necessary feature of the modern financial system?
Mark: Certainly the modern financial system, because of the way it is structured, particularly the way it is structured in terms of, again, monetary interventionism. Interest rates are not free-floating. It doesn’t have to be that way. It’s more of a philosophical disagreement between natural free markets. Are they inherently fragile, and need us to protect ourselves from them? It doesn’t need to be that way but unfortunately it is that way.
Erik: Some people say crashes – maybe not necessarily as big as the one that we had in 2008, perhaps more along the lines of what we had in 2000 or what we’ve had since, some of the stuff that was brought on by sovereign debt bubbles and such in Europe – are going to become more frequent. Do you think we’ll see crashes more frequently?
Mark: You know, I don’t have a good feel for the frequency or the timing. It’s something that I’ve always made very sure to stay away from, and the nature of my investing affords me that. I think we are going to continue to see deeper and deeper ones, simply by virtue of the fact that the degree of interventionism is larger and large. It gets incrementally higher every cycle. In some ways we’re still recovering from that great bubble in 2000, and so the economy needs more and more in order to keep us afloat from that.
Erik: Tell me about the next crisis. What do you think it looks like?
Mark: The way I structure risk mitigation, which is what I do certainly, means that I don’t have the luxury of knowing what the next one is going to look like, thinking that I know what the next one is going to look like. I don’t claim to have known what 2008 would look like, even though we traded it the way we did. For me, insurance-type of investing the way I do is really about covering all of your contingencies. You can’t just isolate one contingency. You need to be able to cover many of them.
Erik: What I had in mind was more along the lines of this. People look back at 2008 and say it was a once in seven decades event, we haven’t seen anything like that since 1929 and the great depression. And it’ll be another seventy years before we have another crisis like that. And I’m just trying to find out whether you think there’s any validity to that kind of thinking. If you can’t predict crashes, can anybody else?
Mark: Yeah, there’s validity to that. In many ways I agree with it. But at the same time, everyone knows you can’t fight the Fed. And you mustn’t fight the Fed. What you must try to do is sort of jiu-jitsu the Fed. You need to sort of use the Fed’s force against it.
Erik: I like that. The Fed is going to do what the Fed is going to do, in other words, and you as an investor have to respond?
Mark: Well you need to be able to go with it in all directions. That’s really the point here. There’s a great cliché that says offense wins games and defense wins championships. I hold that very close. It’s one cliché that happens to be very true in the realm of investing. And that’s because of course compound returns – the rate of compounding – is all we care about in investing and it’s the severe losses that crush the rate if compounding. It’s not the small losses. So this is the reason why I focus on the severe losses, the crashes. So what does that mean? I call this a volatitliy tax, where large losses crush your rate of compounding. We need to think about that. Von Clausewitz’s first principle is secure your base. And this is what we all try to do in portfolio management is secure our base. It’s not what we get through Modern Portfolio Theory.
Erik: Now, when you describe yourself as a portfolio manager many people might be confused. They think of a portfolio manager as somebody who is trying to make money by taking positions that are going to increase in value or generate return over time. You’re doing something different.
Mark: Yes, certainly. To think about it simply, Universa is a safe haven, but it’s a particularly explosive, insurance-like safe haven. And it’s there specifically so that the more explosive it is the more systematic risk my clients are able to take.
Erik: Many investors who hedged or who diversified gave up much of the upside in equities since the financial crisis and we need only look at hedge fund returns for example to see that. Now, hedge funds don’t necessarily need to beat the S&P 500, but they do have to deliver value to their customers, and many of their customers or clients don’t think that they have been doing that. What did these investors who hedged or diversified do wrong?
Mark: Modern Portfolio Theory sold us a bill of goods. And that bill of goods is that if you lower your volatility through diversification – it’s this dogma of diversification – if you lower your volatility yes you’re also going to lower your arithmetic return, but if you get that ratio going up all is well. And then you can take some leverage – which is kind of crazy in itself that good risk mitigation requires leverage – and all is well. You’ll raise your long-run return. But it just hasn’t worked out that way. As we diversify, de-worsification is really what we’re doing when we diversify. Diversification, of course, in this environment too where all correlations spike to one when you least can afford them to, it’s a fundamental problem, and its’ so contrary to the way I think about it, it’s a completely different way of constructing portfolios, which for me is about focusing on the downside and mitigating the volatility tax.
Erik: So, if people want to understand a bit better what you do, and more and more, with some $10 billion under management now people are beginning to see the value in what you do, help us appreciate the nature of a tail risk hedge. What kinds of things are in the Universa portfolio?
Mark: Well without getting into specifics, as I said it’s an explosive, insurance-like payoff, but specifically explosive insurance-like convex payoff to what you have in your portfolio. So that’s the important thing. We can’t get too fancy, in my view, about knowing exactly what that next crash is going to look like. We need to get all of the contingencies right. What that means is whatever your exposures are you need to have very specific downside crash-convexity to those exposures.
Erik: But you find that where, in out-of-the-money options?
Mark: Well yeah there’s a range of places where we can find this in derivatives markets.
Mark: In order to get the type of asymmetry that I’m talking about it really requires the use of derivatives, yes. So that’s a good simple way to think about it.
Erik: We learned in 2008 that derivatives contracts themselves can blow up. Are the derivatives that you’re trafficking in now safer instruments than they were in 2008?
Mark: I’m not sure. Again, this is a contingency I don’t want to have to think about. I don’t feel like I have an edge in that. I don’t feel like anybody has an edge in that. We all suffer from this hindsight bias where we think we had that last crash, for instance, figured out, we think we understood the cause and effect. I don’t have the luxury of cause and effect. I don’t have the luxury of thinking everything though exactly the way it’s going to pan out, because I will absolutely be wrong. So my simple solution to that is I don’t take single-entity counterparty risk. I face the exchanges. The saying goes it’s kind of like buying Titanic insurance from someone who’s on the Titanic. It’s just not a great idea.
Erik: The cost of protection, at least as measured by the VIX, and I know that’s an imperfect measure, has mostly been low, mostly, over the past ten years. What if insurance gets more expensive?
Mark: What if it does? It’s likely to be associated with an event. That tends to be how it works. We saw it happen very briefly last February. The interesting thing in this age is when we see these flare-ups how quickly it all comes back to cheapness again. I expect we’ll continue to see that and the reason is selling insurance is just sort of the most obvious and most straightforward way to earn this extra yield. We are in this yield-starved, yield-chasing environment, and again it goes back to central banks.
Erik: But how is it that those guys who were, if you will, selling insurance, got destroyed in February, and you didn’t?
Mark: Because I’m on the other side of that trade. I’m not selling insurance, I’m fundamentally on the other side of that trade. I’m purchasing insurance from the market, insurance-like payoffs, so there’s really a pretty steady drumb-beat of supply on the other side because it feels so good. It feels good structurally as a professional trader, it feels good cognitively to make this little premium most of the time.
As we reported yesterday, the Department of Justice is looking into Tesla for wrongdoing as part of a “criminal probe”. The investigation was reportedly spurred by Elon Musk’s early August tweet in which he stated that he had “funding secured” for a bid to take Tesla private at $420 per share. But now it’s being reported that the Department of Justice inquiry into the company may wind up heading in other directions, possibly opening up a “Pandora’s box”, if they are given enough new strings to pull on as a result of their initial look into the company.
As Bloomberg notes, DOJ investigations in their early stages often end up in different places than they start. Sometimes they can wind up uncovering additional wrongdoing than they set out after, other times they can lead to easier outcomes, like fines and settlements. According to Paul Pelletier, a former Justice Department prosecutor, the roadmap for this investigation of Tesla remains to be seen.
He told Bloomberg: “Criminal investigations are never good if you’re a public company because they open up a Pandora’s box and prosecutors will follow threads wherever they lead.” According to former Federal prosecutors, they will likely be looking for evidence in internal documents and emails. Pelletier also stated that the lack of a subpoena doesn’t necessarily mean that the investigation is limited. Rather, he suggested that the DOJ could “piggyback” onto the SEC’s subpoenas.
The Securities and Exchange Commission was reportedly already investigating Tesla for whether or not its Model 3 production forecasts were misleading. Another area that the DOJ/SEC may wind up looking at is why the company’s new chief accounting officer wound up picking up and resigning – leaving a potential $10 million dollar equity award behind – after less than a month on the job.
Michael Koenig, who prosecuted former Qwest CEO Joseph Nacchio, also reaffirmed that what can sometimes start as an investigation of one subject can wind up moving on to another. He stated: “When we were investigating Qwest, we initially thought there were accounting fraud and revenue recognition type issues. As we started digging into it, however, we realized, ‘Wait a minute. Joe Nacchio is selling large amounts of his stock at the same time he’s telling the general public that the company is doing great, when he knew it was not.’”
He also brought up the example of the Hillary Clinton email investigation, which was re-opened after new evidence came to light during the Anthony Weiner investigation.
While most comments about the probe focused on how it could inhibit the company’s ability to raise capital, Morgan Stanley’s Adam Jonas instead issued a note on Tuesday stating that he thought Tesla could wind up raising as much as $2.5 billion from selling equity in the fourth quarter. He believes that the fundraising could come from “investors who have a strategic interest” in Tesla’s business model.
He wrote: “Bulls may say that if Tesla generates enough cash, it doesn’t need to raise equity. In our view, it is far better for a company to raise when it doesn’t need to.”
But just like with the criminal probe, Morgan Stanley seemed uncertain about the outcome. They predicted an “event path” unfolding over the next couple of quarters that could result in Tesla’s share price winding up at anywhere between $97 and $441. So much for specificity.
We had previously reported that the SEC had subpoenaed Tesla in relation to a formal investigation. The question of whether or not there was wrongdoing relating to Musk’s Tweet looks like it will be a fairly simple one to answer with subpoena power, with whether not Musk had willful intent being the key. If the SEC and prosecutors can prove this, it may result in a worst-case scenario for the company and its embattled CEO.
The Volkswagen Tilray short-squeeze is becoming unbearable for pot bears, as a result of the minute moves in the stock, which moments ago soared to $300/share.
We will let readers catch up on the TLRy story, but what was remarkable is just how clinically TLRY tumbled the instant it hit a record high of $300, sending its market cap above $25billion, at which point the stock was halted on three occasions: once ruing the algo liquidation, the second during a furious ramp higher to catch up $230 to $266, and then again, shortly thereafter on another down move which has taken the stock to $220 from $300 just minutes earlier…
After the halts, the spread in the stock’s bid/ask was as high as several dollars as liquidity in the name appears to have completely disappeared. At this point the new momentum chasers are once again loading up, with hopes of sending the stock even higher, in a move that bitcoin fans recall not so fondly, largely due to what happens next…
With 30Y yields blowing out, the long end is “coming unglued” in the words of Nomura’s x-asset strategist Charlie McElligott, who writes today that as the “bear (steepening) raid” in US Treasurys grinds-on, the Fed skeptics (i.e. doves) are being forced to converge to the 2019 dots, with EDZ8-EDZ9 now implying 51bps of hikes next yr (from just 34 at start of last week), a topic we discussed earlier, and is the reason why the FOMC’s median 2019 dot will be so closely watched.
Why the sharp market move (assuming, of course, that China isn’t dumping Treasurys)? According to McElligott, long-end in particular is coming unglued after being range-bound for the past four months, is due to a re-pricing of either 1) inflation expectations (higher) or 2) the market “buying into” the Fed’s unwillingness to “invert the curve” (via a “pause”) or 3) some mix of both.
And, as the Nomura analyst explains, the stars have aligned for the “Bearish Rates/USTs” thesis for 4 potential reasons:
Some in the market are upgrading their view of the “neutral rate” / R* off the back of the wage growth data, monster employment trend and ongoing inflation trajectory
Three “former doves” from Fed have capitulated “hawkish” of-late (Brainard, Evans and Rosengren) on “white-hot” economy—Atlanta Fed GDP Now forecast to 4.447% from ‘just’ 3.783% last week
“Supply Shock” catalyst remains intact as well: the issuance-deluge continues unabated in fixed-income across both U.S. IG Credit ($138B MTD, with Oct averaging $150B the past two years) and USTs (net coupon supply at $110B this month, +$71B for Oct)
A final controversial catalyst: post Sep 15th, we’ve seen the “disappearance” of the tax-reform driven “duration-bid” as the deduction window to fund contributions closes
Whatever the reason, the bear steepener is also emblematic of McElligott’s “two speed year” thesis, in which the market macro regime realigns due to the “QE into QT” transition (from my “Cyclical Melt-Up” phase ONE of the first six months of the year, to the “Financial Conditions Tightening Tantrum” phase TWO), which the Nomura strategist calls the standard “late-cycle” economic- and inflationary- overshoot (kinda feels like the “now,” amirite?!) “THEN violently spasms and lunges into a new reality where the Fed is then forced to “over-tighten” at some point in the near-future—say between 1Q or 2Q of 2019.“
McElligott’s “#scorchinghottake” is that we are now in the final-throes of this normalization and that the market will tantrum before we see the Fed’s 3 (some say going to 4!). Meanwhile, Nomura sees 2019 hikes remaining firm—partially because I already see investors acting hyper-sensitive to any signs of “late-cycle” and / or “financial conditions tightening”
And, as evidence of his thesis, McElligott points to yesterday’s Fedex earnings print, where despite raising full-year guidance by 20c/share (something that would have likely merited a +3% to +4% move in recent quarters), “the ‘classic late cycle’ issue of INCREASED LABOR COSTS reducing earnings was instead punished -5.5%, the largest down move in over 5 years.”
How to trade it? Here are Charlie’s 5 highest-delta scenarios over the coming year:
We get two more hikes done by year-end ’18 (and bear-flattening resumes), and at the time of the Dec hike the SPX likely prints new highs;
Perhaps then after that March hike, however, the Fed’s (ridiculous) concerns about the optics of the likely “imminent” curve-inversion at this time then sees them attempt to “pause” normalization to satiate the market in order to prevent “tantrums”—steepening begins
Despite this Fed micro-management, I think the Equities market will continue to negatively-respond to the idea of resuming tightening, especially as the positive tailwinds of the fiscal stimulus sees “diminishing returns” and tighter financial conditions “bite” economic activity.
At this time, the SUSTAINED curve-steepening will have escalated alongside the “pre-recession” trade, as the “consensus view” becomes that the Fed has indeed been accelerating their “tightening into a slowdown.”
For the long-suffering bears, McEllgiott notes that ‘”only THEN do you get “risk-off” trades and the larger “Value (cheap stuff left-behind) over Growth (crowded expensive stuff)” trade in U.S. Equities.”