Author Archives: Kevin

Enter Sandman

Despite historic dislocations in developed economy term structures and sub-par to average growth rates, the Fed seems poised to adjust the baseline funding rate on the financial system. If the rate was an indicator of the calibration of monetary policy, then perhaps all the media discussion would be warranted. Over the last 6 months, since the first adjustment, markets and economic activity have not cratered as many predicted.

Our model would set the O/N rate around 70bp under present conditions, nearly double the prevailing 37. This common widening -and INCREASED accommodation -at this stage of the credit cycle has supported the expansion A host of geeky rates with exotic names will need to adjust behind the Fed's publicized move (should they pull the trigger). Unfortunately, because quantitative monetary policy is still the true measurement (not rate targeting), extremely tight yield relationships beyond 1 year could usher in trouble.

Eurodollar pack spreads typically over 150bp have compressed to new cycle lows. EDU17-EDU18 is a flat-lining 23bp. That's a level consistent with TV ER doctors yelling, "Clear !" Quantitative Easing is an HG Wells time machine for policy. It helps a system jump past deep disruption in the short term and screws up future history. Those kinks and folds are now apparent out on the forward curve. Attempts to adjust in either direction - narrower and they invert, wider and they cause liquidation - will cause consequential reactions.

"Sleep with one eye open - grip your pillow tight."

Parts Known

Anthony Bourdain has finally found a proper home for his muse with the  "Parts Unkown" series on CNN. The CHICAGO edition is not to be missed and I've watched it multiple times already. The connecting of people, neighborhoods and legend through alchohol and food has never been more educational.

The glaring ommission of the Chicago episode is the Pits. Long gone from significance, they were once the Petri Dishes of Chicago's finest, strangest, brightest and most twisted minds. Whether eating chicken fried steak at Riccobeni's with Steve Albini or drinking at 2:30pm at Old Towne Ale House, the episode's missing "jag-offs" were the Merc's and CBOT's finest. I (I am proud to say) was one of them. The Big Onion will never be same.

I, like many (most) of my brothers in arms, have moved on to new adventures. The city's shoulders, still broad, are clearly hunching over. And yet, in the bars, comedy clubs and eateries the characters keep turning up. Good on ya, Chicago. And good on Tony Bourdain for doing it right.


Blame the Buck

The dollar was "too strong" in January and blamed for falling oil and stocks. The recent fort-night of falling prices has been blamed on a falling dollar. The dollar seems to have a strong connection to the Fed beyond Econ 201. The Fed is often blamed for being "too tight" and "too loose" based on the net change of some security. The greenback suffers the same indignation. Erwin Schrodinger's cat would be jealous. There is another possibility, however, that neither conclusion is correct. The buck is neither too strong, nor too weak. The value of our fiat, like all others in a faith based system, is up for negotiation.

The current patterns have the SP future going to 2030 and the Naz to 4294.17

420 Bob

Hooper went on rampage yesterday completing UP patterns in SP,Dow, Commodity Currencies, Corn and Beans. Adjusting up to the new pattern numbers is critical today. The Corn market has been exciting as the rally played into our El Nino scenario laid out last Fall. The flooding in Texas coincided with the first Omega Block of Spring.

The breadth of the "EL Nino Rally" will stir the neo-inflationists from slumber. The real fun - selling bonds and buying corn - will come later this Summer. Until then, don't be a Bogart while Hooper drives the boat.

Who Reads TIME Anyway?

Jim Grant of Grant's Interest Rate Observer, an iconic bi-weekly that periodically even talks about interest rates, penned another historically interesting, metal loving, something's gotta give, fun read in TIME Magazine. In other words, hardly anyone will read it. But read it you should and really think about the title, "The United States of Insolvency"

Mr. Grant is careful to hedge any call for collapse, return to yellow metal, or even trouble. But rest assured, bad things are coming folks. You see, there's "too much debt" and "the deficit is too big" and "rates are too low (or too high- its hard to say)" and "the recovery has been weak" and "Medicare and Social Security will bankrupt America."

There's a great scene in Blazing Saddles where Sheriff Bart tells the Wacko Kid,  "Anyone who drinks like that will surely die." To which the Kid replies, "When?" Any self respecting market participant of even moderate concern sides with the KId. In the words of Tudor-Jones, "Don't tell me why, tell me when."

My long held belief that "Concern for public debts is inversely proportional to economic knowledge" is well documented (and a big reason my CNBC hits declined during Tea Party [remember them?] water carrying). The unique characteristic of this cycle - which will turn roughly 9 months after the yield curve inverts - has been the near universal ignoring of its existence. For better than 7 years, a sub-industry of counter-factual reasoning has blossomed while the majority of Americans - and American public companies - have improved.

I enjoyed reading Mr. Grant's missive. I enjoyed it even more sipping wine on a sunny Spring day in the vineyard. When the cycle actually does turn, as all eventually do, most will have to simply admit they missed the ride.


Now To Something Completely Different

Last week, China allowed the Renminbi to jump .5% in a day to the highest level since the end of 2015. The ECB probed the possibility of going negative to an extent only American politics could imagine. Demanding some stage time, the Fed penned some wishy-washy generalities sandwiched between head scratching comments from Kocherlakota and Bullard.

A bit of context: Back in the 70s PBS aired a cutting-edge comedy show from England called Monty Python's Flying Circus #GIK. When skits would devolve into chaos or get stuck in an improvisational dead end, an authoritative voice would simply interject, "And now to something completely different." The era of quantitative easing has reached that point.

Let's consider some "insight" from the Fed:

From Bloomberg View

The U.S. Federal Reserve's latest economic projections contain an encoded message crucial to understanding the central bank's policies: Inflation has been stuck below the Fed's target in part because officials don’t actually want to get it back up.

It's important to recognize that the Summary of Economic Projections, released four times a year, does not consist of forecasts about the real world. Instead, each member of the policy-making Federal Open Market Committee is asked to pretend that he or she has complete control of monetary policy. Under this assumption, they submit their baseline assessments of how the economy will develop.

Forward Guidance


If, for example, you were a monetary policy hawk who thought the Fed was keeping interest rates too low, your economic forecast might include excessive inflation. In your projection, however, you get to choose your own policy. So your submission will feature the higher interest rates that you think are needed to keep inflation in check -- not the outcome that you actually expect.

Ya follow?? And given all that mental masturbation, put the FF rate at .875 !

Abrupt segue to Bullard, a CB-er giving flip-flopper a new meaning. cut to CNBC -

James Bullard, president and CEO of the Federal Reserve Bank of St. Louis.

David Orrell | CNBC
James Bullard, president and CEO of the Federal Reserve Bank of St. Louis.

This is a breaking news story. Please check back for further updates.

Low rates may be causing low inflation, St. Louis Fed President James Bullard theorized in Friday remarks.

Bullard, who is a voting member of this year's Federal Open Market Committee, suggested in prepared remarks for a policy conference in Frankfurt, Germany that the current period of low interest rates and low inflation could potentially persist for a long period of time. Furthermore, raising rates could conceivably increase inflation, he said.

He didn't conclude this argument was correct, but suggested it deserved further analysis.

RUFKM ???!!!!

Here's what needs to happen  - and if you have a pulse and a Twitter feed you know what I'm going to say - The Fed needs to can the Openness Experiment. It needs to stop steering a quantitative regime with a rates compass. It needs to concentrate on the calibration of policy as reflected back to them in market prices rather than attempting lock markets down in a faux-stability 4th mandate.

And now to something completely different....

You Can’t Holler Down My Rain Barrel

I don't wanna play in your yard

I don't like you anymore

You'll be sorry when you see me

Sliding down your cellar door

Sung by Peggy  Lee Written by Philip Wingate

I enjoyed an Anderson Valley single vineyard Pinot Noir with the Democratic Town Hall and couldn't get this classic tune out of my head. I must confess the song is embedded in my memory by Warren Beaty's incredible cinematic adaptation of John Reed, REDS.

Clearly, Bernie Sanders has never seen the flic. Inter-cut amongst the rallying revolutionaries are close up direct-to-cameras of people who knew and associated with the real characters. (The inclusion of Jerzy Kosinski, a personal hero, as a cast member was mind altering.) The populist rhetoric of Sanders echos the brave, naive hopes of Socialist "revolutions" of far greater magnitude than his. Trump creates a straw -man neo-facist counterpart to stir the progressive socialist mirage.

Watch the film. Observe the slow dissent into chaos that socialist good intentions wrought, while enjoying stellar performances by Jack Nicholson (Eugene O'Neil), Maureen Stapleton (Emma Goldman (GIK) and even George Plimpton ! (Ya GIK!) We have an historic footprint of what happens to counties that find themselves slipping toward the false hope of Socialism. And yet.... That our young and "college educated" could embrace such a failed concept should shake my generation to its core.

We "paid back" the Greatest Generation (the one that fought back against the consequences of John Reed's failures) with the longest, strongest economic expansion in modern time. The growth focus delivered more to the world than any grand social justice plan. Presently, the US is being awarded a window of opportunity to issue long term and alter the course of history. We learn from others' mistakes or doom ourselves to their failings.

I don't want to play in your yard - I don't like you anymore !

Into the Gloaming

You have to ask yourself, "Why would they let it happen?" The EDZ16 again is the heaviest part of the strip, as Fed induced hallucinations of "hikes and normalization" filter back into the pricing. The contract has dropped 30 ticks in a month. The futures curve, after a slight bump, remains essentially flatlined (a medical term for DEAD). The Red/Gold (a 2/10 proxy) is 75, a shocking 20bp lower than the actual T curve. Yesterday, the Twitterati finally noticed Japanese bonds trade under US 2s !

It doesn't have to be this way. It could last into the first 100 days of the next Administration. The US is presented with an historical "green light" to do something reckless with its policies. We seem to be opting to spiral into the gloaming with the rest of the developed world. Its time to get out the paddles, stand clear and shock. These spreads need to explode. The Fed needs to shut up and go away.

Bud Collins

The tennis world and sports writing lost a giant yesterday with the passing of Bud Collins. Boston-ites were lucky to have Bud reporting on sports and sports legends well beyond the tennis lines. But the tennis boom of the 70's was ignited by the likes of B.C.

The trading world needs (needed) a documenter of "our sport" the way tennis had the madras panted Collins. He combined genius wordsmithing with vast historical knowledge to bring each event he covered to life. No event benfited more than the live broadcast of The Championships at Wimbledon. Bud, and co-conspirator Donald Dell, convinced NBC exec Don Ohlmeyer to do "Breakfast at Wimbledon." Knowing that the All England Club started precisely on time, the 3 prodded one of the players to slow down in the locker room to allow for the "hard break" at the hour's top. The tradition was born and is now embedded in July 4th celebrations across the country.

Any tennis fan of even moderate degree came to know the likes of Laver and net judge Fingers Fortesque because of Bud's energy and quit wit. I was pleased to see the wonderful memory Jason Gay wrote in today's WSJ. Tennis is better because Bud was a part of it. The trading game would benefit from an eccentric, enthusiastic historiographer like Bud Collins. Well played, sir.



The collapse of this relationship in 2016 is a graphic representation of the poor data and negative rate gloaming. In "normal" times - remember normalization? - the spread would move out toward 150 bps with the Fed around. Instead, the year long jawboning to 1st hike produced a short blip....then collapse.

The sister relationship in Euribor is an "above par" handle -3.5 !! The bear flattening on the T curve has facilitated the recent pop back to life. The sketchiest type of improvement. (as 2yr to 5yr T sector leads market down the Red and Green Euros widen to the front). We prefer to trade the 2nd year spread, with March already upon us, we will be switching to Sep16-Sep17 promptly. The wider the better. Contango? This will go down as the shortest tightening cycle ever.