Monthly Archives: May 2018

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.