Completely different Market Recap today. In many ways I feel like I lost control of my own site. It’s not that I don’t welcome commentary I do but I get the sense my own views are being spun and turned back to me as chatter from a perma bear.
If you have been a regular reader you know two things about me. One I speak the truth as I see it and two I do not waffle. I have made a call, granted time has taken longer than I anticipated or hoped but I have not waffled. Nothing but time has stood in the way. In my view nothing has changed in the trade.
Many are tired of this trade. I imagine a number of called it quits and either gone long and or stepped to the sideline. There is nothing wrong with that. You have to trade in accordance with your style and risk tolerance. For those who are still in this trade though that is who I write for today.
It has become a truly lonely trade yet that is what is needed for it to play out. Those who fail to see what other see does not mean it is not there. One of the most important lessons of entering a longer term trade is understanding why you are in it. What is the basis for the trade. Failure to realize that can cause confusion and real losses. Purely looking for price as confirmation or rejection of your trade thesis is not accurate. You need to understand what it is that truly drives the trade and will eventually drive price to your target.
For example in this trade I have been consistently discussing credit, primarily treasury futures and the currencies. They have continued to move in the direction I have forecasted. Equity prices have zigged and zagged and caused frustration and trials through this trade but the basis has not changed. Credit and the currencies are moving in the right direction and as we have learned in the past will force the hand of equity.
I think people look at treasury in the wrong way. They focus on the coupon payment and say why would I invest for 10 years and earn 2% when I can invest in stocks? Why not think of treasury as a dividend paying stock? In other words treasury is breaking to all time highs AND pays a dividend. Stocks on the other hand do not pay a dividend (most) and are not at all time highs.
From a pure trade standpoint you would invest in the asset class breaking to all time highs. Just like you wouldn’t hold a stock for 10 years why are you expected to hold a treasury? In that light perhaps people can see the significance in a treasury breakout and how it will pull capital away from equity.
Below are two charts that explain why the breakout in the USD is significant and has broad implications for equity prices.
USD VS CRB – Below is a one year daily of the CRB commodity index versus the USD. It is a class ying and yang relationship. When the USD moves higher commodities move lower and vice versa.
CRB VS SPX - Below is a one year daily of the CRB commodity index versus the SPX. The SPX tries to distance itself from the CRB but simply cannot sustain such a move. The end result is a quick “gap fill.” Notice the gap right now in the face of a CRB breaking down and USD breaking up. Prior “gaps” are also highlighted.
Over the past three years the intervention by central banks has not only inflated asset prices but has also inflated investor risk. In other words investors now perceive risk differently and feel downside risk is limited purely due to the “central bank put.”
That is true until panic sets in as indicated on the chart below when $700 billion in cash was injected in the market. Not chatter of guarantees of guarantees or six month QE style purchase but actual cash (really debt) and look at its impact on equity.
The market is more powerful than the Fed and central banks when panic sets in. History is our witness to that statement.
Today’s post was written from the gut. It was written not in defense of my own trade. I do not need confirmation and or support of others. It was written for those still in this trade and seeing what I see. It has become far too lonely out there to be trading a credit event by shorting equity.
I have complete respect for those who trade shorter time frames or with a different style. Anyone who trades the capital markets has my respect, bottom line. It is not easy whether it be a full time source of income or part time hobby of sorts.
But again this post is for those who are struggling to stay in this trade. It is not meant to be a cheerleading effort to say I am right. It is meant to use hard data to show how the trade is playing out as expected. Central bank intervention has simply extended the time for this trade to evolve.
Additionally the equity market demographic is far different today as it consists of more HFT and intraday trading activity which has extended the trade. Thus equity’s ability to forecast and price in risk has greatly diminished.
Yet credit which has not changed in demographic has continued to signal problems ahead and been the true indicator of the overall health of this trade. Remember one simple rule.
Things take longer to develop than anticipated
and resolve faster than expected.
Images: Flickr (licence attribution)
About the Author
Macro Story is designed as a one stop source for all of your macro related news and data. From credit markets to economic data to geopolitics, you will find it all in a simple and organized fashion. Content is presented in a format that allows you to read as little or as much as prefered. Whether your goal is to do advanced research, a simple market overview or to become educated on macro subjects, the site has been designed with you in mind.