Author Archives: Kevin

On Money

Today, as @Conorsen tweeted out, the "benchmark" LIBOR hit a new cycle high with the 12 month rate (#GIK) offered at 1.37%. (Long time delusional readers know this means we put the equilibrium FF rate at .77, thus CB policy has been quite accommodative of late) The 10 year government bond is yielding 1.57 but was at 1.37% as recently as July 5 ! Any casual observer of Dodd-Frank and its morphings understands the regulatory aspect of wider interbank sets. Many of us began to estimate where the "Financial System 2.0" spreads should be as long as 7 years ago.

The WSJ has several articles highlighting the interest "savings" of low (Negative - hello Spanish 2 year auction) rates on borrowing governments. At the height of the "Debt Crisis" debate and populist fear mongering, we argued that just changing the trend and letting the economy grow was more than adequate policy. Even marginal growth rates have delivered adjustments large enough to bring  more pundits to our "Issue more for longer" camp.

The critical distinction is the difference between money and debt, even as quantitative policies seek to blur and merge (blurge?) the two. The dollar's waxing and waning becomes a Dramamine ingesting barometer for clues to what lies down the road. Currencies, especially global fiat currencies, are poor compasses to steer policy by, however. Which takes us back to interbank benchmarks. In a world of Central Banks exotically bolstering government borrowings with Flying Buttress purchases, the risk-free rate becomes irrelevant. "Things" other than risk-free are better reflections of financial system vitals. Here's the message, their yields are going UP.

Corn Sweat

Corn has lost a dollar in value recently and the entire grain complex completed down patterns in the model again Friday. Farmers are hoping the high temps over the next week produce some kind of price pop. No one we have spoke to since arriving in the mid-west feels loftier pricing can be sustained for long, however.

So much product has been planted in the age of abundance that a new weather condition has developed in the Plains called Corn Sweat. High heat and fence post to fence post "Frankencorn"  combine to sweat so much moisture into the air as to send humidity readings and the heat index soaring. Watch for this phenomenon this week.

We have felt that income bumps and basic service price increases would combine to nudge inflation readings up enough to expose the folly of low (negative) FI renting for capital gains. Public transportation, road tolls, rents and Starbucks are all costing more. The incoming weather pattern should provide some flopping around in grains but the crop as a whole remains enormous.

The Other Exit

Star Wars creator, and Chicago political player Melody Hobson's husband, George Lucas exited Chicago and returned to the Left Coast on Friday. The "Friends of the Parks" group, which has done some good protecting Burnham's vision, had tied Lucas up in the courts over a parking lot. The billions of dollars lost in this populist battle could have fixed the air-port flaw in the Death Star and returned the Big Onion to the world stage.

Chicago, as is its host State, is in a monetary crisis. That a Lucas-sized construction and tourist project could be lost faster than the Millennium Falcon can do the Kessel Run is astounding. That the job couldn't articulate its way through the Machine is testimony to Rahm's inabilities. Daley would have "got her done." So, take a spin southbound on LSD and enjoy the view of crumbling asphalt and wasted space, hum the Star Wars theme and imagine what might have been...a long time ago in a city far far away.


The SP Future has declined 55 handles from our June 6 post "Enter Sandman." Yesterday, 100s of thousands of new position calls were bought in the Sep Gyro contract and the Fed did nothing. The market, now more than ever, tells us nothing about the future, even the near future. The amazing constant of the media coverage of the capital markets is the promulgation of the foresight myth. All this activity, technology and money has to tell us something, right?

Wrong. And you can hear the stretched reasoning getting louder this morning. I can say without hesitation that I have no idea what those 55 handles mean to the economy, let alone the world. Instead, I would suggest you read the June 1 edition of Fortune on the rise of private companies. The top private companies involve riding in other people's cars and sleeping on other people's couches. They don't need public capital because they don't produce any goods or own many hard assets. What could the daily sloshing around of public shares possibly tell you about that?


Yesterday, the Economics and Finance crowd from the San Francisco area gathered for a day conference. Amid the rosy outlooks and bullish unicorn tech scenarios, one talk really resonated. A slightly frumpled B of A economist presented a matrix of income to housing that swung from healthy to unsafe.

The Bay area housing market clocked in at a ground shaking 3 times the "unsafe" marker. Our prediction is shortly after the new President is sworn in, the market topic will be "How much impact will the West Coast housing crisis have on the Heartland?" Remember 1990 my millenial friend? Oh wait, sorry.

Deep Thoughts

This post is from @interestarb . You should read it. I don't ask many peeps for their opinion about things, but I definitely ask him !


What the U.S. Federal Reserve may fear most at this point in time Prior to the May Employment report, many economists, financial market participants, and other economic/market watchers (aka financial market journalists) considered the idea of a July rate hike in the U.S. as ill fated or simply unwarranted. One small 25bp move geared toward normalcy, that for some had already been delayed, has little chance by itself to upset the current U.S. apple cart in terms of domestic consumption and business. However, years of Zero Interest Rate Policy (“ZIRP”) have fostered a highly leveraged fast paced trading (not investing) community ravenously pursuing profits that could start the ball rolling. With a sometimes dangerous heard mentality, and get me out first mindset that can easily overwhelm and trample the true mechanics of market place price discovery. This and the memory of the “Taper Tantrum” is what the Federal Reserve may now fear most, the markets ability to overreact and create havoc. It’s not about the actual underlying U.S. economy operating on its own merit, but how it may be impacted by possible financial market upheaval overly sensitive to the winds of monetary policy. At the same time, the Fed’s forward thinking must also incorporate the interconnectedness of many global factors that could spillover with the potential to have domino like effects. The Federal Reserve seems destine to continue the waiting game, to live in a world where it needs all the planets to be in a line to ever so slightly alter it’s current policy stance. Unlikely “to boldly go where no man has gone before”, the question now is how much longer will the Fed be content to err on the side of over accommodation and live in fear of its own shadow. Some Members have hinted at above target inflation acceptance, but with a 4.7% UER they would clearly be behind if that were to occur. Again, there are participants who may find that acceptable after years below target. Things may be about to get a tad more interesting.

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.