2016: $1.2T
2006: $700B
2001: $420B
$SHV @ 7yr highs ..... basically a TBills equivalent ETF . Stuff breaking / people scared . Paid a real dividend back in 2009
inflation is a change, not a level -
I SHOULD COCO
These contingent convertibles have been around for a few years, but with banks keen to shore up Tier 1 capital ahead of the release of the ECB's Asset Quality Review, they've been issuing like hot cakes. Sure, they're converts, not traditional bonds, and there are some quirky aspects to them that make them difficult to price, but the yield is pretty tasty.
Fast forward a year, and high yield is looking ropy. Investment grade's hanging in there, but the returns aren't fantastic. Meanwhile, over the last year and a half the contingent coverts have generated a total return of more than 10%. Is it any wonder that both banks (given the official imprimatur of the regulators) and investors (keen to clip juicy coupons in a low return world) said "I Should Coco"?
Now, of course, both sides are rather looking like Gaz in the Supergrass album cover above. Having generated total returns of more than 13% over 2014-15, Cocos have given it all back and more so far this year. All of a sudden that boring IG index isn't looking too shabby....
One of the main issues with Cocos is the heterogeneity of the product. All have some sort of trigger, but some convert to stock and others wipe out a portion of the principal. Some, like the infamous DB 6 percents, suspend coupon payments if the issuer doesn't have enough spare change. Many have triggers based not only on book or market value, but also on the discretionary judgment of a regulator. Oh, and they all seem to have prospectuses of 130 pages, which Macro Man would be willing to wager were not exactly diligently studied before many of these deals were bought.
Much like the world of exotic options, introducing barriers and triggers generates a great deal of non-linearity into pricing. Part of this non-linearity gives the owner of many Cocos an embedded short gamma position to the downside; i.e., they own the bonds and they're essentially short puts against it. Surprise, surprise, that free yield wasn't so free after all, and when stock prices fall Coco holders are forced to sell as a hedge. Thanks to the ECB and their own endeavours, that seems to be exactly what's happened to DB.
Now one of the features of short gamma is that it can produce nasty overshoots that lead to reversals that are just as nasty. Perhaps that will be the outcome here. However, even a gamma-led bounce does little to assuage the impact of negative rates, and one would have to think that the current episode has certainly raised an appreciation for the embedded risks in Cocos as an instrument, tempering enthusiasm for them moving forwards. It's a timely reminder of the lesson that enthusiastic diners on AAA rated ABS turdburgers learned in 2007; if something seems too good to be true, it generally is.
That being said, the malaise affecting the global banking sector looks to be about a lot more than Cocos, or even negative rates in certain jurisdictions. Worryingly, the global sell-off has been unusually synchronous, even in places like the US where Cocos did not get the blessing of the regulators and the Fed has yet to pursue NIRP.
It's a holiday in Japan today; lord knows they need it. The Topix bank index is down 23% in the less than two weeks since Kuroda made what now looks to have been a horrible mistake, closing at 133 on Wednesday. To get an idea of how painful that is, Macro Man had a friend run a VWAP on the Daiwa Topix banks ETF for the last year. The closing price on Wednesday was 138; the 1 year VWAP was just under 204. Gulp.
As for USD/JPY, the warnings presented in this space over the last few weeks have come to pass, with necklines and clouds broken with alarming ease. Macro Man would caution to account for the Japanese holiday in your assessment of recent price action, as well as the possibility that the GPIF or Kampo might magically decide to bid on some dollars when they get back to their desks. That being said, the chart is pretty clear, and Macro Man reckons that "goodnight Irene" implies ~105 eventually.
In a way, it would by a fitting symmetry a la the FANG/GDX chart presented a few days ago. After all, that was the low during that crazy period in mid-October 2014 before Kuroda-bomb #2 shocked markets and sent USD/JPY on a rocket ship ride. The only thing that could make it worse is if we found out that Mrs. Watanabe has been stocking up on Cocos...
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CLICK HERE FOR COMMENTSNow there is no precedent. CBs are forging into unknown territory seemingly without any long term plan. I mean we're now at a situation where Riksbank eases into 4% real growth to combat deflation...to prevent loss of confidence...
If 10 years ago somebody had said that Sweden's economy was growing at 4%, inflation @ 1%, and there was a full panic mode in riksbank and running -0.5% rates looking to ease further, would you have believed? Would anyone have?
F-ing Krugman really did a number on them. Total psychological breakdown. Alert suicide watch when in a year or two they start hiking and it all comes down. If it was just the Swedes, it wouldn't be such a problem, but CBs are more or less all losing their sh*t.
And now markets know that there is NOTHING guiding them. And suddenly those historically high PEs look bad enough to panic sell into improving economic fundamentals.
It's even worse. We lack the most basic science backed macroeconomic models to figure out what the eff is going on. Well, we'll get those models alright, empirically straight up our collective butts.
last year i wrote that CBers will be hung for what they have done - the total confusion in markets is palpable (especially today..) and CBs have lost credibility
planning ahead this could be the capitulation i was waiting for - all hell is breaking loose, we need big volumes to exhaust selling for the weeks to come
Next the Swedes burn all the mattresses at Ikea
The only price inflation we'll get from this is at the dunce hat store. wonder if those are in their cpi basket
... if they tag anyone showing up at a bank branch for change... there was a piece last year on the staggering growth in 500€ note printing - the all time favourite for any mafia and tax evader, will you now please stand up. When all hell breaks loose, chasing tax fraud becomes numero uno
111....
closed USDJPY too early had no idea it would precipitate so fast
Abe is shitting his kimono, Kuroda probably seppuku by this evening
Nico,
would you dare to give medium and long term targets?
European indices are already in no man's land, Italian banks are trading like failed biotech - breaking 1800 on spoos later today could force sidelined portfolios to be liquidated
If we stop here 1950 spoos would be the number to beat until May.
If we see 1580 in the coming weeks you really have a different story
It "should" get smashed based on other markets price action and Spoos always lagging but following.
short term stuff though, the world and their mother might still need to cover their short JPY
Europe is recovering a little - now it is up to the far West cowboys to save their 1800 and put a floor on the market. I won't be awake for the first 90mn on NYSE shame it's gonna be rock n roll
Interesting that oil is breaking new lows and the commodity currencies have not broken with it. With the yen pairs getting liquidated I would have thought there would be more liquidation of carry currencies.
That is pretty amazing, wti at 26.09, AUD.USD at .7036 and USD.JPY at 111.51. AUD.USD seems a tad high considering the other 2. I wonder if AUD.USD will be still above 0.70 if wti slips to 25's.
NOK follows... then BRL despite the political risk (probably priced in)
CB intervention is starting to look like a total disaster, and you know they always decide to double down... God only knows what they are going to do next. More QQE? It appears that the Usdjpy correlation is back in force.
With rates as low as they are now globally, a 2008-style crunch seems impossible, but Japan-style asset deflation in global markets is clearly knocking on the door. I am waiting for an Albert Edwards Permabear Financial Winter forecast again.
Usually this is time to buy, an oversold bounce is way overdue. But the longer-term prognosis isn't good, is it? As in 2007-8, the perception that "they" are losing control is taking hold, and I fear the mass psyche of elephants running in one direction.
Plus ça change.
Presumably the members of the Hikers and Hawks club and the rest of the rate hike steepener tools are being rear-ended in the most delightful way. The particular manifestation of fear seen in long bonds is always a great fade when the time comes. We are not bending over in front of the steamroller here but we are watching the TLT mini-bubble with tremendous interest.
Once this subsides, there should be an almighty rally in mREITs. Longer and lower and f*cking possibly NIRP is set in stone. The Hikers and Hawks were always out of their tiny little birdbrain minds.
I cant remember where I heard it but someone said that the equity markets can shake off one or two bad narratives, but when you bombard them with lots of uncertainty its too much
Lets recap what’s worrying the markets this year
1) China devaluation - Currently its pretty stable but you still have talking heads like Bass thinking it will implode and to be frank the capital outflows are still a problem
2) Oil and commodities. While Nico is right that a lot of commodity currencies have bottomed, WTI is pressing new lows and everyones favorite EM currency, the MXN is getting thrown out as well
3) Banking Stress – See MM above. Add in a little SocGen miss for a good stir
4) CB losing the plot – The Yen, Gold and Government bond markets are sure doing a good job of trying to convince me.
5) US political uncertainty
Now with Spoo’s right on the edge of the 1800 cliff heading into the weekend, it seems like we are setting up for a crash. FWIW, I see this as a great buying opportunity (when the dust settles) but you have to play here an now, like BiT said. Or like in Trading Places, Sell Mortimer, Sell!
Markets change. They have many times in my lifetime. They will again. I happen to think that this is a logical playing out of 2007. There we had a major crisis that was not allowed to resolve itself. So governments stepped in, and markets were supported by various means and a type of solution was declared that we've accepted for years. But the solution required investors to believe credit risks were managed and would be managed as time went on. At present day, cracks are appearing in the facade. Credit by governments has been called into question.
You can do a Hussman and rail against what you see happening in front of your face, or you can make money.
US FI LOOKING FOR RATE CUTS..FIVE ME A BREAK!!
Buying some TBT here in cash - I am willing to make the bold and scary bet that the US will be able to achieve a 1.6% plus nominal GDP growth for the next 20 years with a growing population alone, debt or no debt - BinT I know you disagree, but on this one my trade horizon may just be different than yours.
Great post MM! I agree with this too ...
"You can do a Hussman and rail against what you see happening in front of your face, or you can make money."
Nimbleness and cynicism are important at the moment. The spike down in bonds as U.S. traders waded into the office was telling I think, and I wonder whether the bond bulls are better off cashing their chips here. I just does fell like it in the short run.
Looking at TBT too Washed. Gap is getting filled ... I think it could be a winner!
fundamentals of NZD still quite strong versus GBP, also Brexit hangs in the air plus their current acct deficit
A meaty-whore!
here is some comic relief in that make-or-break instant on the tape
i've been following the Evil speculator since he was mentioned by an anon here in the forum last year, like he was some kind of god and from what is said on the site he ha(d) a good track record
it is dumbfounding to watch him struggle that much with the tape this year. I only get 'public' feed on his dip attempts but there are all stopped. His initial brilliant 1950 short got stopped too. It goes to show that his risk/reward was probably calibrated for a tape a la 2011-2015. And clearly not fit for 2016
last August i said that 2008 price action was here. People opposed that view and expected yet another V shape bounce into new highs. The fact that we never got any new high on Spoos (Europe was already abysmal) should have been the warning to all, that someone had dramatically changed, especially after the brutality of August (VVIX record)
i do not understand why that Evil speculator and other folks with 20+ year experience struggle so much to acknowledge that 2016 is different. I am feeling terribly uneasy because i know how cruel market is. It now seems intent to punish those who either started with, or perverted their trading analysis to accomodate the QE mantra.
Nw they are all crying like babies because Yellen does not seem to care about equities anymore. As mentioned how i was kicked out of 'Trading The Charts' excellent community in 2007, for being too bearish. As crap hit the fan real hard in 2008 its founder emailed me saying it was ok to register again.
We became friends, his American dream was shattered and albeit excellent Elliot analysis showing everything down, he went on for his last 'belief' trade, far from his technical conviction, and died of a heat attack in October. I think of him all time, as a reminder to never let your emotions go in the way of price action.
I want this market to bounce because i do not want the world to suffer. But sentiment wise, there are still too many guys playing the long side and as you know market extrema are only reached when everyone is thinking the same way. It takes years for everyone to all become bullish.... it takes much less, in a bear market, for everyone to become hopelessly pessimistic but we don't seem to be there yet.
Good luck everyone
"BMW sales rise 7.5 percent in January on demand in Europe, China"
is stuck high up in Finviz news feed since this morning? seems like they are desperate for good news to 'stay'
No one is right all of the time (them guys or anyone). Dare I say it not many are even right MOST of the time and that definitely includes everyone on here including me. It isn't even necessary has a prerequisite to making positive long run returns. I won't even go into the what is required because those of you who know don't need telling and those still think being right most of the time is what it is all about probably won't want to listen because for them it's about ego not numbers.
Here is some commentary from Horseman Funds..up 20% last year, 8% in Jan...
I spend most of my time, while looking at current prices, thinking about
and trying to live six months to one year in the future. Thinking about
what will be the reaction to what is happening now, and then thinking
about what that means future prices might look like. Generally that has
worked well for me.
What I can see now is that US growth is slowing, and that the market is
likely to price in reduced monetary tightening. This should lead to a weaker
dollar. This makes shorting Europe and Japan very appealing.
Theoretically, this should make commodities and emerging markets (‘EM’)
attractive, particularly if you are of the view that US dollar strength is the
reason emerging markets and commodities have been so weak. However, I
think we have chronic oversupply of commodities, and real financial issues
in China that cannot be resolved easily. This makes commodity related
areas very unattractive, despite the prospect of renewed monetary easing
by the Federal Reserve. Furthermore, the reaction to reduced tightening by
the Federal Reserve, would almost certainly be more easing by every other
central bank in the world. But as we have seen recently with both the ECB
and BOJ, monetary activism is not always effective. I also worry about the
prospects of a trade war, as populism becomes the new normal in politics
globally. The future for me is now more uncertain than at any time I can
remember. Or to fully quote the Chairman of the Board from Margin Call,
“I'm here to guess what the music might do a week, a month, a year from
now. That's it. Nothing more. And standing here tonight, I'm afraid that I
don't hear - a - thing. Just... silence.”
Your fund remains long bonds, short equities.
Behold the flawed wonder of humans and our huge but tiny minds, simultaneously detecting gravitational waves while howling at the moon.
google the evil speculator, thats the name of the blog run by that trader
T - good to see you back and adding commentary - y I agree on consumer staples.
Nico, you called it - I don't have any convicted view other than the risk reward on long bonds isn't great at 2.5% when SWF will have to eventually monetize it, and the downside on crude is now limited to $26.50, half of the previous time we were at this level on ratesl
2016: $1.2T
2006: $700B
2001: $420B
$SHV @ 7yr highs ..... basically a TBills equivalent ETF . Stuff breaking / people scared . Paid a real dividend back in 2009
Funnily, opec cuts have historically had the exact same impact historically as rate cuts in terms of shoring up the markets - zero.
Due a pause here, at a minimum. With sentiment largely one way now, 'more than a pause' would be no surprise.
Reasonable arguments might be made for the following:
1. Oil prices are depressed for known and non-enduring reasons. In any case there are many positives to cheap oil.
2. European banks are far less bust than they have been for the last decade. They will muddle through.
3. China slowdown was inevitable and necessary, but China will still be a massive contributor to global growth for the foreseeable future
4. CB's were never as omnipotent as they and (many) financial market participants have perhaps believed. In the long run this won't matter - other than to financial market participants.
5. 1,2,3&4 are not systemically connected other than by ZeroHedge subscribers
Will we look back on this period as one of irrational despondency?
anon501
in all fairness i don't. You ought to focus on one group at best. The variety of views and conflicting timeframes expressed in the excellent MacRo Team is rich and hard enough to follow to add even more opinions.
imho financial information is a poison - you have to calibrate the feed to your very timeframe and be extremely selective there are too many 'experts' out there so as time goes, you will handpick the ones who contribute to your trading, not confuse it. If anything 2016 is a perfect environment to test various blogs. A couple of folks are in full deer in headlight mode proving there were nothing but QE aficionados and offer no added value other than quantitative cheering.
Perhaps MM can launch a separate topic on 'your 5 preferred websites' where we all can give our 4 favorite websites after MM muhaha
Seems like the markets today want simplicity, and if you look at a lot of successful companies (in tech especially) this is what is rewarded. CS and too many other banks are still holding too many iliquid assets, which is where the bulk of this quarters losses came from
I think it would do the market good if all iBanking was privately owned. Let the banks do commercial and treasury services, but get them out of the capital markets. If you want to be an investment bank, put up your own capital and keep it away from public markets. I think this would solve a lot of problems and the way markets are throwing out financials today, I think its what the market demands (though in fairness, Regional banks are in the gutter as well)
FWIW, the traditional Swiss bank inside CS did rather well, even with negative interest rates. It was the iBank that has ppl worried.
the years 2016-2020 will see a financial revolution - besides a long need split within existing traditional behemoths it is so likely the Bay area is thinking of revolutionizing banking the same way airbnb and uber shook their respective industries
Mild recession / slowdown in the cards for the US - as we have been saying for a long time - but nothing more serious than that. Not with energy prices this low. The US consumer and broad economy by and large thrives on such conditions, despite its recent change of status from oil consumer to producer.
This is a panic, like all panics it will pass and yield to more complacency. It has been interesting, but it is not 2008. We will take our cue from the Treasury market, but it is possible that the top may be in for now in the long bond.
"...We could see inflation of 3-4% in a couple of years. Now, even the most novice investor can understand that owning a bond with a negative yield in a high inflation environment is the most nonsensical thing ever.
Since 2011, Amazon (and all that stuff) has been going higher.
Since 2011, metals and commodities and EM have been going lower.
Suddenly, three weeks ago… these trends abruptly reversed.
My thesis is that the deflation trade is over. The inflation trade has just begun.
Which means: don’t buy AMZN, and don’t short gold. This is the first inning.
..As usual, the market is doing what nobody expected to happen. Nobody is positioned for an inflation trade. Some well-known market pundits and economists have been talking down emerging markets for years. They haven’t stopped. The thing about most people is, they always miss the turn because the bearish thesis is most compelling on the lows. And they are blind to evidence that contradicts their thesis.
.. I have always believed that the inflation trade from 2000 to 2011 was the motive wave, and the correction from 2011 to 2016 was the corrective wave, and now we are back on the primary trend, in an inflation bull market lasting 25 years or more."
Seems to me if DB is 10% as bad as discussed on this blog, DB needs either recapitalization by issuing more equities or nationalization by ECB/German taxpayers.
How can one be sure that DB won't explode in the near future?
Tony Plummer chart from May 2008: http://postimg.org/image/3lk5x6kux/
I, for one, welcome our inflationary overlords.
Very well put - just think about it - inflation is a change, not a level - whats crude more likely to do long term from $15-30? contribute to deflation or inflation? What are wages going to do with negative productivity trends, political trends and 4.9% matched skill employment - go up or down? Is the next move of DM governments likely to be to buy bonds yielding negative, or instead finance a round of carte blanche social and infrastructure spend?
Maybe the US will stall, maybe it won't - but if you can have jobless recoveries, you can also have jobby stagnation - there, a new phrase heard first on Macro Man's porch - expect to hear much more of this from the media in the coming years!