Here It Is

The somewhat late but always delivered 2018 Commencement Address from the Dog:

Congraduations Graduates ! My classmates and I stepped out into an economy with 9.6% Unemployment and 3.25% inflation (the real stuff not the pro-cyclical, exclude everything going up stuff). You are taking the great leap into about 2.8% inflation and 3.8% unemployment. If you want to work, you can. Not true for us, and I was interviewed by the Cleveland Plain Dealer about what I called "optimistic under-employment" with my shiny new Economics degree.

What "we" proceeded to do was deliver the largest and longest economic advance in history and the promulgation of free democracies around the world. No pressure. I'm sure that Women's Latino Communications Studies degree is worth every 4% student loan you have against it.

Cycles are cycles; and you - nor us - had any input on when we dropped on the Blue Marble. But I would caution that the gloaming of 1983 may well have been a better timed real world entry point than the joyous present. Here's the unasked for advice of one former interest rate practitioner turned grape stomper:

The rest of your life will be distilled down to 2 things: Work and Love (your interaction with people around you). Everything else is drama. Get on a team and try and bring it home for the big win. Stop tattooing and piercing and altering your bodies, its just The Mullet without an out. Get out of your phone. If your closest relationship is with a 2 inch by 4 inch device, you picked the wrong device.

Bring something to the table. As an employer, I can tell you I want candidates that can buy into the Mission and Execute. Your time for strategic thinking is years away. So, welcome graduates of 2018. We may have created the financial bombs that destroyed the world, but at least a few of us stuck around to try and fix it. What world will you be passing on 35 years hence?

I take back what I said about, "No pressure." The pressure is ON and it's not going away.

To Recap

 

From the Dog 2016 Debates:

Last night the would-be Republican nominee for President referred to the economy with the same adjectives he used to describe entertainment footnote Rosie O'Donnell. "Big, fat, ugly bubble, " was how Mr. Trump analyzed the state of the US economy, throwing in a few innuendo laden half sentences about Fed Chair Janet Yellen. Nothing unifies the populist movement like Fed bashing.

Always short on details, Mr. Trump then let the armchair conspiracy theorists (having already outed the obese, bedridden, hacker crowd) fill in the gaps by chastising both low interest rates and the consequences of raising them. Surprisingly, neither candidate laid out even a HS sophomore's argument on the optically creepy and monetarily sketchy practices of IOER and QE bond buying regimes.

Hey, tariffs ! let's do that too.

There was an old X-Files episode where a dude who could really see the future would kill the TV fortune tellers and right before he offed them would say, "You should have seen it coming."

Classic stuff and always reminded me of traders. So the Admin elected to mix up a big pot of tax cuts and trade tariffs into the Fed's rising rates and the self proclaimed "Rosie O'Donnell Economy." It's all so painfully obvious, you really should  see it coming.

PTJ

PTJ spoke with ARS today in a pretty rare interview. No real shocker headline but I did notice a nuance in his answers.

Paul Jones once famously said, "Don't tell me why tell me when." As close as he got to that today was "after the midterms." If you haven't seen the 1987 PBS documentary Trader 1) why are you in this business? 2) Go DO Now.

Anyway, We obviously feel the same way PTJ does about rates and believe its already on. No need to wait for election results. We also have posted here that the tax cut will put the onus on the FOMC and PTJ seems to agree.

He said his exposure was abnormally low right now confirming his belief that the "when" is "not yet." Based on his statements I would venture he does have a decent amount of Reds and Greens on the short side.

Seriously, WTF is going on?

An old mentor of mine - Gary Bialis - used to say to me, "Kevin, in a bull market EVERYTHING goes right, and the opposite."

A quick recap: The soul of conservative movement - free markets and free men - is sold out for a tax cut during a well established up cycle. 12 years of deeply flawed "deficit hawk, balanced budget, Tea Party, sequester, wealth chasm inducing vitriol" is thrown overboard. An obviously dangerously inept President sends his entire spineless Party leadership into hiding. Foreign leaders (and domestic ) are publicly bullied by said Moron in Chief. The G-7 is essentially gutted. Our allies are insulted and confused, not just by our Jethro Bodeen without the kindness POTUS but by the voting American decision. And to top it off, we legitimize one of the most dangerous and cruel leaders in the world!

My father fired the first shot in the Korean War. He's spinning in his grave.

Warren Rudman once dressed down Ollie North about Iran-Contra (GIK) saying, "The Constitution gives the people of America the RIGHT to be incredibly WRONG about things."

What he didn't have to say was that means there are incredible CONSEQUENCES to that freedom. The Bull Market lets/makes everything go/seem right -- and the opposite ! When the market turns down a lot more than your Fidelity statement is going bad.

Avec Tony

It was difficult to muster a caring market focus on Friday, when woken to the news about Anthony Bourdain. The NASDAQ tagged a downside pattern and recalculates Sunday. I first got into Tony's writing on a plane to St John with my family. They had given me copy of A Cook's Tour for the trip. I knew of Kitchen Confidential but never read it. I've re-watched the documentary version of A Cook's Tour many times since and the constant development of Tony's voice into this season's Parts Unknown is remarkable. It's hard to change, it's even harder to get better doing it.

Trading pushes a person to follow a similar arc. You can be arrogant and lucky young (box checked), you can see how your passions effect others as you mature (check) and you can try and be a better person from the knowledge (workin' on it). My musings here and my periodic "Merc Stories" are inspired by Tony's ability to connect to something bigger than the food in front of you or the trade just initiated. My move into wine is a consequence of spending most of my adult life messing around with ethereal things like fixed for floating. Grapes are tactile, soil is real, wine is magic.

My take away from this tragedy is knowing Tony at 61 - dark demons and all - was a better version of himself than 30 years ago. It's hard to change. It's even harder to change for the better. Sometimes, it fails. You have to keep trying. Sound like trading?

Dog Unenjoyment Post Mortem

Friday's great news on the employment front now needs to be looked at in the broad context of the Trump Presidency and future fiscal initiatives.

Every POTUS gets to claim accountability for good economic news (and they eat the bad) whatever arc of the cycle the find themselves in. This Administration, at the urging of a before fringe group of Alt-Right Tea Partiers and faux deficit hawks (my deficit is ok, its your deficit that destructive) elected to push through a strong tax policy revision 9 years into a firm advance.

The rallying cry of the partisans was the speed of the advance, not fast enough. The reality was/is the moderate steady advance (and choppy cycles abroad) was key to the long aggressive easy monetary policy of the other hand clapping, the Fed. Away from the pedestrian spin of Trump carnival barkers like Steve Cortes, the fiscal push is difficult to isolate variable-wise.

Worse, what are the unintended consequences of adding fiscal adjustments onto a stable advancing system? The Fed is, and will be forced to continue, widening the global interest rate differentials. This increases turbulence by design. A moderate economic hic-cup could have had the tax policy card safety net.

The undeniable good news is - contrary to the high decibel hate spewed by the opposition - the innovative and aggressive flexibility of the Central Bank halted, reversed and promulgated an amazing retreat from a financial system black hole. The present tilt of the administration is accelerating the need to reverse those very successful structures.

Alternative Facts

Officials disagreed on whether the flattening of the yield curve was a reliable signal of a recession. The yield curve is the plot of government bonds of different maturities, and an inverted yield curve has often preceded recession.

Several officials said it would be important to monitor the slope of the curve. A few others thought that central bank asset purchases and other factors made it less important.

Fed minutes today showed the FOMC is willing to downgrade one of the most reliable economic indicators of the past 40 years.

Most pundits discussing the curve structure do not do so in the historically significant way.

Here's a Hooper Primer on the curve:

For cocktail party guests: Steep = good.  Flat = bad

For the "long term equity holder": Reduce exposure between 3-6 months after inversion between 2 and 10. The heavier the twist the more you run.

For the trading addict : Don't worry about the long end so much. If 2/10 or 2/5 track gradually inward, monitor if its because short rates rising or belly rates holding steady, falling. If the money curve inverts rapidly, run. Watch 1 year rates (money and Ts) relative to 5 year. And evaluate the 5 year yield relative to the growth rate. Finally, if the Fed hikes the funding rate to a level where 12 month money less 60bp is lower than FF- short everything.

Gravity

"The one thing I still know is you're keeping me down." S.B.

New York's hottest club is OverStatement  - it has everything, complex algorithms, pedestrian explanations and correlation charts that look like the Chicago skyline when held sideways.

 

I use a simple mathematical model to  help me know when to bet on an unknowable future event. I named it Hooper after the Richard Dreyfus character in the movie JAWS. Quint would always say to Chief Brody, "Hooper drives the boat Chief." And Roy Scheider, like my trading, would grudgingly shovel chum.

The thing is I don't need to understand the complexities of the universe to make it work. Today, too many market pundits are caught up in complexity. I utilize what I call the Gravity Effect.

Gravity - It's not just a good idea, it's the law.

Complex systems do not lend themselves to predictability. That is, they are uncertain. Uncertainty is not the same as risk, however, so Hooper guides my risk decisions in an uncertain complex system. I don't need a lengthy explanation for a given. The "gravity" is there, we all agree, it sucks, next.

Here's one of my favorites from the Khan Academy on the subject:

https://www.khanacademy.org/math/probability/scatterplots-a1/creating-interpreting-scatterplots/v/correlation-and-causality

What I do know for certain is the Ultra-Bond has declined from 168 to around 154 since Dec 2017. Over that same time frame the SP has gone from 2700 to 2727 but the trip to nowhere is wrapped in an awfully chaotic seizure between 2883 and 2532 ! So what's the point? The point is trying to calm investor fears or extrapolate general economic activity by looking for correlation between 1 day of bond movement and 1 day of equity movement is the last bastion of a charlatan.

"We thought the good times were yet to come, we didn't know we were in it. Oh gravity, don't let go" Infamous Stringdusters

A Man in Full

In a near perfect moment of tribute, Hooper clanked down a cluster of short moves in the T complex today. This morning we learned of the passing of Tom Wolfe, 80's zeitgeist bond market chronicler and real life BSD. Since its publication in 1987, the bond market has essentially gone UP. The biggest artifact tossed on the bonfire was us, bond guys who like to sell stuff.

If written today, Wolfe's story would most likely center on some socially awkward tech billionaire selling your personal data to foreign governments. But, back in the hey-day, the world turned on the Bond Boy's axis. The great trading houses traded FI and the greatest traders navigated the short side with positions gargantuan for the time (and puny by today's standards).

Godspeed Tom Wolfe. Sherman McCoy and Ken Kesey are a part of our DNA thanks to you.

Hooper will re-calibrate tonight and we'll get back to selling again tomorrow.

 

Echoechoecho

People across the political spectrum have been quick to discuss the echo chamber feedback loop reverberating between a certain cable channel and the POTUS. We have long held the view that a more subtle, but just as dangerous, agreement loop has been promulgated by the Federal Reserve.

When Roger Ferguson was charged with charting the "openness" at the FOMC, a slow slog into the choir preach began. Today, the once admired tea-leaf reading skills of a "Fed Watcher" amount to little more than regurgitating the carefully developed script under the working title "Don't Worry, We Got This."

Balance sheet roll off, funding rate tweaks and SOMA/TBAC objectives are just micro-bumps in the Fed/Media echo canyon that, "There's nothing to see here, move along." A random volatility explosion? Like the lady with plaque psoriasis, "It's fine." A relentless year and half rise in term LIBOR sets? Pulease, what's LIBOR? Something stinks.

I started thinking about this like minded agreement society while running some rates through my model. Just wondering, if the wind down is so simple and without cause for concern, why has the FOMC elected to stay 2 hikes behind a neutral calibration? Looks to me like the non-public view at the FOMC is actually caution and concern.