Market Reactions

July 22nd, 2018|Economy|

Last week, we had Trump causing waves with this Putin meeting, and ending the week talking about tariffs on ALL of our imports from China.  We had the following weekly reaction from the markets: S&P was unchanged, ED white pack was down 0.6bps, and ED gold pack was down 6.4bps. While the pricing in any given week can be all over the place (especially a low volume summer week), this was curious when Trump noticeably escalated trade tensions with China.  It’s not clear to me if: (1) the markets are underestimating the potential growth tail risks of a full-blown trade [...]

My Tariff Central View

July 8th, 2018|Economy|

The markets just don’t seem to care about the trade tariffs.  Stock have been chopping around in a tight range, and the front end of the FF curve is pricing in roughly the same amount of hikes.  The argument I hear all the time is that at the end of the day, a 25% tariff on $34B if imports is not going to have much of an effect on a $19 TRILLION economy like the US.  I suppose that’s true.  But you have to factor in that this dispute with China could escalate to $500B, and that we have similar [...]


June 24th, 2018|Economy|

Whenever I have a hard time with macro views because of news uncertainty, I like thinking about scenarios.  Most people think only about the current yield curve, but you can also look at the conditional yield curve - the yield curve implied by the options market.  You can use this conditional yield curve to structure trades such as: if ED6 is at price x by time a, then ED10 should be at y by time b.  Typically, a = b, but this is not necessary.  This may be the topic of a future CA.  For now, I just want to [...]

Game Night and Wages

June 3rd, 2018|Economy|

Every now and then, we’ll have Game Night with some good friends of ours.  One friend works at one of the largest companies in the US, and the other works in a small multinational firm.  Usually we’ll have an hour or so to chew the fat before dinner and occasionally, I’ll ask them how the economy looks from their perspective. This time, I was really curious about wages, so I asked them about how salaries worked at their firms.  It’s been over a decade since I worked for a company, and I was very surprised at how wage increases were [...]

Some Clarity

May 6th, 2018|Economy|

The outlook for the economy and Fed policy had been a little murky the past few weeks.  A number of things are starting to become clearer, from the Fed, data and news last week: The bar for the Fed being spooked by inflation is higher. The Fed went out of their way to put in “symmetric” TWICE in the FOMC statement.  This also makes an overshoot less likely.  Several Fed members (in particular Dudley and Williams) have come out and said that they are comfortable with inflation being somewhat higher than their 2% target.  I think the symmetric discussion probably [...]

The Next 25bps in US Tens

April 29th, 2018|Economy|

I was talking to someone at a dinner party and they asked me what I thought of yields, now that we went over 3% in tens last week.  For someone who looks at the yield curve all day, I have no strong conviction on direction.  Whenever this happens, I like listing all the arguments down and seeing which side makes more sense. THE BEARISH CASE We have strong global growth… more or less. The European data has faltered some, but there is no strong reason to think the growth couldn’t just keep chugging along at 2-2.5%, as it has for [...]

High Yields and Equities

April 22nd, 2018|Economy|

I ran across this chart yesterday (a retweeet from 13D Research and Bloomberg), and I thought it was interesting because we had some unusual price action Friday.  Normally, when equities drop almost 1%, you would expect fixed income to rally noticeably (especially after the volatility-driven market nervousness earlier in the year).  But the long end of fixed income actually sold off noticeably!  I suppose the longer end of the yield curve did (over)flatten the prior few months, so perhaps we were due for a correction. Since the volatility scare a couple of months back, it’s felt like fixed income has [...]

Trade Tariffs Potpourri

April 8th, 2018|Economy|

The markets are difficult to trade directionally with the markets whipping around on trade tariff headlines.  We have no significant competitive advantage in trying to guess the outcome.  There are a lot of people out there with more information than we have – people who actually speak to the inner circles of Trump and Xi.  And even if we knew what the final outcome was going to be, it’s probably going to be a long process and we have no idea if the next major trade headline will move the markets the wrong way before moving the right way. The [...]

Q2 Preview

April 1st, 2018|Economy|

We could see extremely interesting price action this quarter.  There are a number of catalysts we had been anticipating in Q2.  Let’s look for opportunities in the next week or two in the following areas: Equities.  We had been looking forward to this next set of earnings for months now.  We should see the effects of the lower corporate tax rate and investment incentives.  We will also get the announcements on what will happen with the repatriated earnings.  I would think one of the reasons people have liked buying equities on dips is because of the anticipation of these pieces [...]

Equity Regime Change?

February 11th, 2018|Economy|

I’m not one of those people constantly calling for an equity correction.  Last year, when everyone was on the “October crash” bandwagon, I said while this was possible, that seemed liked a crowded trade and that the positive EV (expected value) was probably to the upside.  Most “analysts” will just look at something simple like a P/E ratio and not consider the other things going around them… like the corporate tax reductions, individual tax reductions, repatriation, a new infrastructure spending plan, the popularity of short vol strategies, and global central bank QE.  If you weigh all of the above, it [...]