Sept 7 Below

The Fall, with debt supply and widespread material rebuilding, should provide plenty of opportunities to once again short the obligations of the government, a favorite non-grape based pastime. 

Sept 8 10 yr future - 12728

Oct 25 10 yr future - 124.06

and you're welcome. But remember, the fed buying less and less of said debt and rolling down its BS is not a negative...I heard everyone on TV tell me so !


Sons of 1984
Open your eyes and see
The world I couldn't change for you
Reach out your hand and take
The world that will belong to you
We were on our way to a better day
And the spirit was in us all
But as time went by we fell by the wayside
Maybe you'll be the last to fall
You are the only ones
There is nobody left but you
You are the chosen ones
There is nobody else to choose
Back when I was young, my hope was strong
But the time blew it all to hell
If I thought I knew what was good for you
I would have gone and done it for myself
Worlds of tomorrow
Life without sorrow
Take it because it's yours
Sons of 1984
I can still see the great panorama of hate
Being cleansed by our loving hands
But the brothers broke stride, the sisters cried
Now you have to start all over again
Songwriters: Todd Rundgren
Sons of 1984 lyrics © Warner/Chappell Music, Inc

The Wildfire of the Humanity

With due respect to Tom Wolfe.

I phased myself out of day trading and micro-bracket analysis several years ago. It was a long a gradual process - there is no methadone for generational animals like me, only isolation and rehab. Now and then, I feel drawn back into the muck to weigh in on the "sitch" .

The current social fragmentation was forecast years ago by numerous commentators. I recall being on CNBC with none other than Mr. Art Cashin when the growing wealth gap was discussed in terms of "ripping at the fabric of society." The shocking aspect is the fragmentation - now called tribalism - is occurring in the long upswing of economic activity and employment. If you hearken back to the financial crisis, many pedestrian thinkers voiced optimism that the financial destruction was occurring with LOW unemployment rates. In actuality, this proved to be no buffer as the socio-economic costs would be heaped on the already fractured financial system. (As opposed to a normal cycle in reverse order.)

Today, as everyday, the level of "the market" is pointed to in a variety of "sounds good" analysis indicating - simultaneously - the strength and impending implosion of said market, The 30th anniversary of "The Crash of 87" (once called just The Crash, but now merely a top 5-er) is a good time for perspective: What did "the market" tell us about the world when it strted to ripple that August? Nothing. What about Continental Illinois 3 YEARS EARLIER ?!![ Actually was the largest bank failure in US history, and my first FTQ.] A surprise? Nope, my Economics professor, Dr. Frank Navratil, had laid out exactly how it would occur almost 2 years prior.  NADA. Worshipers from a host of ideological and graphic religions will sermonize their Nostradomic  warnings of the events. It changes nothing. The gyrations of the mid-80s are significant only because they ushered in the era of activist central banking - often derogatorily, sometimes factually called "bailouts" - that dominates policy today.

The latest risk to that 30 year evolution is the potential nomination of John Taylor to the Fed Chair. The greatest asset in the modern CB tool box has been flexibility. The Greenspan/Bernanke Feds should not - and I believe will not - be judged on the actuality of their policies but on their willingness (mistakenly by AG and presciently by BB imo) to explore the social boundaries of the institution. Taylor would attempt to revert the CB to a rudder steerer, most dangerously navigating by a seriously flawed compass, The Taylor Rule.

My worthless opinion from here among the vines is the potential for screwing it up at the Fed has risen significantly. I have long argued there is no hybrid ground between a rates regime and a quantitative regime that many subscribe to now. Mr Market will judge Taylor to be the rates line in the sand. The curve is as flat as its been in a decade already. My advice would be to concentrate on the BS and let the curve run wild, free and steep. An economic downturn, even a marginal one, with the country this frayed could morph into  social collapse.

My Dog He Looked at Me..

....And he said, "You better get back to Tennessee Jed."

  1. The Summer added more weight to our old belief that what was "wrong" with the narrative of Fed hikes and "normalization" was the calibration of neutral/normal. Foolish metrics like the Taylor Rule and post 70's history have continued to destroy P/L's .
  2. Our model has put the neutral FF rate at about 1.10% and the recent prevailing effective has been 1.16% ( slightly North of where we think it should be, and recent data has been soft-ish)
  3. Labor situation is beyond tight. Case Study - The consequences of legalized Pot. Experienced field workers are being pulled into the Emerald Triangle (in Ca.) in a ramp up to legalization. Hourly rates are floating between $25.00 and $30.00. The Administration's border policy is keeping workers from moving around freely.
  4. The Fall, with debt supply and widespread material rebuilding, should provide plenty of opportunities to once again short the obligations of the government, a favorite non-grape based pastime.

Dog Watching TV

Chart full term

The Ultra-Bond, an oddly named product for those uninterested in the TLT, rallied 11.5 points from mid -H to mid-J. Over the past few sessions it has retreated about 3 points. The chart above saw an un-remarkable 3.5 BP drop over that period. The blip out of the quarter does not show on the long trend picture.

The relationship between EDZ7 and EDZ8 has collapsed to 39 BP over the rally. Also, during this time the Fed has shifted its policy meme from rate hikes to balance sheet reduction. We have long questioned the concept of raising the operational cost of an unprecedented policy adjustment but will leave the debate alone for now. The "signaling" and "de-leveraging" tactics will be graded by Mr. Market over the Summer. The 39bp spread mentioned above seems far too narrow for even a modest BS drop. Something around 3x wider feels right to me.

Purple Hayes

The Spider Network by David Enrich is a book on the LIBOR scandal set for release on Tuesday. The WSJ posted a tease this weekend. The long title is "The Wild Story of a Math Genius, a Gang of Backstabbing Bankers, and One of the Greatest Scams in Financial History." WOW that's a mouthful ! The story focuses on Tom Hayes as the protagonist villain, a scapegoat for a twisted system-wide farce facilitated by ignorant regulators, powerful banking interests and short attention spans. I know, because I operated as an institutional futures broker on the front lines of the "scam."

Long before the financial crisis, I had prodded the idea of a systemic deceit in the money market in periodic appearances on CNBC's Squawk Box. I would dare say I coined the term "LIE-BOR. The eye glazing and subject changing was as rapid as the producer's jump to the next commercial. But let's not get too far ahead, first some background.

The system was a "faith based" system. This structure filtered far deeper and wider than the yellow metal adoring critics cared to explore. "Money", whether geared up as Dollars, Euros or Yen was not constrained to a printing press and colored ink but free to expand into  financially engineered shadows and shared hallucinations. A kind of reverse Cardinal John Henry Newman - "Out of the world of truth and into shadows and images." (#GIK Ex Umbris et veritatem in imaginibus" !) And it all started with a simple request from the bankers.

LIBOR sets were posted by the BBA after a morning polling that originally asked, "Where would you OFFER money to a like participant for a given tenor." Bid ask spreads being sometimes wide (but rapidly closing) and transactions hypothetical to the poll not the actuality, banks and their lobbyists requested that the language be adjusted to "Where do you believe you could BORROW money from a like participant for a given tenor." When the regulators agreed I am sure those players in the room had to strain not to chuckle out loud. The rest as they say is history, or as the only accurate part of the book's title puts it: One of the greatest scams in financial history.

The public would love to believe that a "socially awkward" Asperger -touched "math genius" led a global team of crooks on an international caper of  'bending a few rules and taking a few liberties with their swapping party guests' but it just ain't so. They, We, I were all involved. The structure and older managers unwilling or unable to question the ever expanding -literal - money making machine gave us free reign to lie away. Like all faith based systems, once the lie was exposed  - that one could not actually borrow at the rate submitted - the system collapsed under the weight of the ugly truth. Tom Hayes is a legal convenience.

So, after all the QE, all the Dodd-Franking, all the LSAP-ing and Twisting, what system am I allegedly believing in now?

2 Charts

Chart last year

Chart full term

Here's 2 charts - Peeps love charts - I check at least once a week. Note the chart on left since July of last year. Despite several bouts of TLT loving hype, the unmistakable direction of this benchmark rate has been ? UP.

My friend @Conorsen has attempted to keep Fin Twitter abreast of these developments.

The chart on the left appears to be approaching the downward slide trend of the last 25 YEARS !

Now, I don't know much about charts as I never learned the language; however, I suspect some dark arts voodoo-ist might be conjuring an If/Then statement something like this: "If level X is taken out, then rates are going up to level Y."

From where I sit, its been happening for almost a year.

Big Hitter the Lama…LONG

An omen that the long dirge of low volatility may be ending is the recent interest of the general public in the mundane operations of Treasury Dept. issuance decisions.  Larry Kudlow began floating the balloon in December and Sec Mnuchin gave the meme a boost by saying, "Treasury was looking into the concept." (Spoiler Alert- TBAC has been "looking into" it for years) The pedestrian argument for issuing 50 and/or 100 year bonds will be played by Dorothy's favorite walking companion thusly:

Rates are low, the duration of government issuance is barely over 5 years, "lock in" low rates now. Oh, and asset/liability maturity matching, but we are losing you, so, the first things.

Here's my longstanding argument for devoting time to more important issues:

The shorter duration of the T pool helps grease the gearing of the financial system through its REFUNDING. The key characteristics to refunding are that the secondary market for the issues is DEEP, WIDE and RESILIENT (the decline in this 3rd characteristic to be picked up later).

To promulgate the vitality of the process, Treasury MANDATES that the issuance schedule will be "regular and predictable". When the duration of the pool began to slide toward 4 years, the IR risk was deemed substantial enough that extending duration became a stated, incremental goal of the department. Then, this little hiccup called the complete meltdown of the financial system scared the bejeezus out of everyone and T-Bills were deemed in short supply. The Fed (the guys that get all the attention) then embarked on a once taboo activity for CBs of buying Yucca Mountain amounts of Ts and such also in "regular and predictable" arrangements and doing a little number called Twist. To avoid getting looked at like a sick patient with his hospital gown open, Treasury back burner-ed the duration extension concept. Translation: The Treasury wisely opted to not appear a TACTICAL issuer, a stigma with possible negative signaling to markets.

Kudlow likes to drop this nugget in his pitch for 50s or Centuries, "Ts held by the public have grown from 32% in 2008 to 74% in 2016." I'm yet to figure out what that means except that it would behoove the Gov. to inflate away those debts more rapidly -if it could, it's harder than textbooks would have you believe -since the holders are increasingly it own citizens, but wait, I heard China might own a fair amount of these babies too ! Let's scrap that idea ! FI practitioners (of which I once was and am considering again) compute a thing we call DV01 - dollar value of a 1 bp change in yield. The beauty in the Eurodollar contract was/is the $1million dollar size (if invented today I bet it would be 5 or 10m) and the constant "always and everywhere" $25.00 DV01. (Think of back month Eurodollars -colored Gyros in Dog-speak- as strings of zero coupons) The DV01 of $1million in 50 year bonds, let alone Century, is roughly a messy couple thousand ! The CME Group would come up with a "Super -Ultra " contract to help the hedging but the development would be hindered by the original mandate issues. And here's the problem that relates back to the RESILIENT characteristic - very few people/institutions remain in the business of making markets and gearing these securities. In fact, if the public knew the small cartel of extremely large players inter-acting with themselves, they would become uncomfortable. The Taper Tantrum and 2014 "Melt-Up" were glaring examples of fissures in the most important debt market in the world.

Here's my advice to Mnuchin and the Trump administration: Concentrate on something more important, like a regulatory environment that promotes more participation in the process.


Unenjoyment Day

4.7% and 235,000 never looked so average. I got up early to watch the talking heads spin their political views all over the number. To think hiring managers have ramped up their actions in a policy environment that has been thrown into flux is new wave economic thinking devoid of foundation.

The focus should have moved away from the Employment data several years ago. Retail Sales should be the market blistering data drop of the month. And yet. Our warning over the last month has been the abrupt drop in retail activity. The sector posted a glaring negative in the otherwise standard advance. The "late tax return" meme holds a tad of water but should be gone by the March print and then, well some peeps may actually owe.

The cognoscenti wasted no time in tossing off rate levels 100s of bips higher than the prevailing. FI practitioners were once again portrayed as hapless rubes mesmerized by the Fed's sleight of hand. Equity boys, on the other hand, are brilz. The incredible heavy force of Europe that has been weighing on the term structure, and is now shifting, was never mentioned. The Fed, of course, was "behind" the "curve."

We still contend it is the SHAPE of that curve that needs adjusting more than the LEVEL of rates. The ghost of the 70s/80s  rates anomaly still haunts people's views 2 generations later. Low does not mean "easy" and Higher does not automatically equate to tighter.