Taking profit in the Brazil ETF, EWZ, after a tremendous run. Out at $43.00 and will look to reload at a lower price. Bulls eat, bears eat, and pigs get slaughtered.
Help keep the lights on at the Global Macro Monitor.
Contribute any amount based on your perception of our value added by clicking the PayPal donate widget at the right side of the screen. Thank you!
We heard a market pundit today mention the Fed will soon begin to taper its reduction in the balance sheet. The pundit seemed convinced the balance sheet reduction is on track to total $600 billion per year as far as the eye can see. Not so, Joe!
The balance sheet reduction is on automatic pilot in so far as the monthly maturities coming due in the Fed’s SOMA portfolio of Treasury securities and MBS are not rolled over. That is the total monthly size of QT is dependent on the maturity profile of the SOMA portfolio. The second derivative – the change of the change in the SOMA portfolio – is sharply negative as the maturity profile in each successive year gets smaller (see table). No Fed tapering needed, Joe!
If the total Treasury maturities for any month exceed $30 billion, for example, the difference of the total less $30 billion is reinvested back into the monthly auctions across the curve.
The mechanics of the MBS run-off are more opaque as not only we don’t have any maturity data there is also uncertainty due to refinancings. We estimate the 2019-2021 MBS run-off based on an assumption of a running rate of 52 percent of the monthly Treasury reduction, which is the ratio since the balance sheet reduction began in October 2017.
Upshot
The following table illustrates that the Fed’s balance sheet reduction naturally falls simply due to the profile of its maturities in the SOMA portfolio. Quantitative tightening does not come close to $600 billion that the market clowns were freaking out about over Christmas. In 2021, the balance sheet reduction is estimated to be only $254 billion, which is just 42.27 percent of the $600 billion cap! Still, the Fed balance sheet at the end of 2021 will remain around 3.5x its pre-crisis size in 2007.
Remember the idjits proclamation , “the Fed and Jay Powell know nothing,” at the nadir of the recent crash? What a joke!
This confirms our suspicion the market crash from October to December was likely misdiagnosed. Maybe what ails the market is not solely a cyclical phenomenon and about the Fed, but something more structural, such as too much new debt being floated by the Treasury and the inability of the risk-free rate to rise and find its market clearing level. More on this in a later post.
Nevertheless, it will be interesting to see if stocks can continue to rally on, what we believe, is a false narrative. Stay tuned.
Help keep the lights on at the Global Macro Monitor.
Contribute any amount based on your perception of our value added by clicking the PayPal donate widget at the right side of the screen. Thank you!
If you haven’t noticed, we have been posting specific trade ideas with entry points, target prices, and stops. These are not recommendations but a vehicle so that our readers can hold us more accountable for our ideas, and to also illustrate that following the Global Macro Monitor is a money maker.
Ideally, the trades will generate alpha for, say, a global macro fund, or P&L for individual traders, mainly through event-driven opportunistic trades. Assume we have $1,000,000 in capital or trading limits, which can be levered, mainly with futures.
Let’s call these posts “Opportunistic Alpha.”
Looks like we left a little on the table by selling the China ETF too early. Can get them all.
We just had a large contribution from a reader who said the Brazil ETF trade made him some nice coin and wanted to pay us for the idea. That is exactly what we are looking for.
A special shout out to our friend, Scott in Tasmania, who was our first contribution and jumped on it as soon as we put the PayPal widget up. We will never forget it.
Links to original posts for each trade:
Brazil ETF
Gold
British Pound
China ETF – exit
Help keep the lights on at the Global Macro Monitor. Contribute any amount based on your perception of our value added by clicking on the PayPal donate widget at the right side of the screen. Thank you!
Source: @gabewildau
Help keep the lights on at the Global Macro Monitor. Contribute any amount based on your perception of our value added by clicking on the PayPal donate widget at the right side of the screen. Thank you!
Stocks have seized the bullish narratives — which are “like diseases,”, by the way – of a dovish Fed and an imminent trade deal with China, which should continue to drive the S&P up to its 50-day at 2639.61. Note the vicious sell-off in bonds since hitting the recent low of 2.55 percent on January 3rd. You know our suspicions that bonds have become the instrument of choice for the big, bad global macro equity bears.
President Donald Trump is increasingly eager to strike a deal with China soon in an effort to perk up financial markets that have slumped on concerns over the trade war, according to people familiar with internal White House deliberations. – Bloomberg, Jan 8th
The current rally is based on an unstable narrative, in our opinion. What happens if the terrific trio — Sean, Rush, and Ann — don’t like and the trade deal and criticize the president for selling out the base for stock investors? We don’t see the Fed cutting rates or suspending its balance sheet reduction, which we project at $442 billion in 2019 until stocks are much lower. The bulls, who are driving stocks higher, are thus cannibalizing their own narrative.
Key Levels
The S&P closed just above the key .382 Fibo of the recent sell-off at 2573.61, which opens the way to the next critical range of resistance at 2639 to 2643, the 50-day and .50 Fibo, respectively. We may see some consolidation before the move there, however.
To the downside, it is now critical for the 20-day to hold at 2528.77, which, keep in mind changes daily. Also, the index needs to stay above 2573.61, the Fibo retracement mentioned above.
Upshot
We believe stocks are still in a bear market, experiencing a classic nutcracker of a bounce, but reserve the right to change or mind.
Help keep the lights on at the Global Macro Monitor. Contribute any amount based on your perception of our value added by clicking on the PayPal donate widget at the right side of the screen. Thank you!
If you haven’t noticed, we have been posting specific trade ideas with entry points, target prices, and stops. These are not recommendations but a vehicle so that our readers can hold us more accountable for our ideas, and to also illustrate that following the Global Macro Monitor is a money maker.
Ideally, the trades will generate alpha for, say, a global macro fund, or P&L for individual traders, mainly through event-driven opportunistic trades. Assume we have $1,000,000 in capital or trading limits, which can be leveraged.
Let’s call these posts “Opportunistic Alpha.”
Prepare To Contribute To The GMM
We will soon — in the next few weeks — introduce a strategy that will allow our readers to make voluntary contributions to the blog, which will help the Global Macro Monitor keep the lights on for rest of the year. The contributions will help reduce the opportunity cost of research, data analysis, and writing as we have pared back our trading and off-set some of the accounting costs, such as data and website subscriptions.
The ball will be in your court to keep the hits coming.
Housekeeping
Note, we have moved some of the trailing stops since the last posts.
Links to original posts for each trade:
Brazil ETF
Gold
British Pound
China ETF
Selling the China EFT, ASHR, into the close at $22.46 (corrected from earlier price $22.65 typo see here) for a 1.17 percent return. Not happy with the price action and having doubts that the low-level sherpas in Beijing can move the trade needle. Will revisit.
We’re not sure if we heard Chairman Powell clarify the total balance sheet run-off for 2019, which is important as the pundits are throwing around a number a $600 billion reduction. Completely false.
We project the total run-off in 2019 will be closer to $442 billion, or 73.65 percent of what is being touted.
The $600 billion comes from the sum total of the monthly caps of $30 for the SOMA Treasury portfolio and $20 billion for the MBS portfolio.
Actual Reduction Is Determined By Maturity Profile.
What determines the actual number is the maturity profile of each portfolio.
The schedule for the Treasury portfolio is well known but less so for the MBS portfolio due to uncertainty over prepayments. We use an assumption of 75 percent of the MBS cumulative cap will run-off in 2019, which is close to the current running rate since quantitative tightening began in October 2017.
Only 4 months In 2019 Will The $30 billion Treasury Cap Be Binding
The profile of Treasury maturities is smaller in 2019 compared to the past 15 months. For example, only $11.6 billion of SOMA Treasury securities mature in January versus the $30 billion cap, which is a big difference from the $30 billion of liquidity that many in the market believe will be taken out of the financial system.
In fact, only 4 months in 2019 will the $30 billion caps be binding,: February, May, August, and November.
The downside is the FED’s SOMA will not participate in the monthly auctions in 8 of the 12 months in 2019.
Now you know, folks. Consider it a monetary easing.
Aggressive, tenacious and litigious Paul Singer may be the most feared investor in the world — by hedge fund rivals, companies and even countries. This is how he made billions through activist investing. – Bloomberg
Global Macro Monitor 