Meeting Of Minds – January 2019

Published on: January 28th, 2019

In this month’s Meeting of Minds, Raoul takes an in-depth look at the corporate debt markets. Julian, meanwhile, after refreshing some investment charts, demonstrates how the feedback loop from stocks to confidence to investment to growth leads us inexorably towards a recessionary environment.

Comments

  • RM
    R M.
    30 January 2019 @ 23:36
    This is written post Fed full throated “uncle” to the market on Wednesday. Roaul has already tweeted he thinks it is too late in the cycle and will not save it. My question to Raoul and Julian is how do we know if this view is wrong? Do we wait for a postitive cross of the 20 week over the 50 (that would be a pretty late signal). What do we look to step back in long? I basically agree with the slowdown coming view but always want to challenge the view. Thanks!
    • JB
      Julian B. | Contributor
      9 February 2019 @ 09:20
      RM I like to use the moving averages to keep me honest ie set a broad longer term trend. I then trade around them using the 5 week faster index as a trigger.
  • VG
    Vivek G.
    31 January 2019 @ 14:27
    Hi Raoul, Julian Do you have an signed view of the USD post FOMC? I seem to pick from Raoul a strong USD and from Julian a weak USD. Appreciate clarity pls from both. Regards Vivek
    • JB
      Julian B. | Contributor
      9 February 2019 @ 09:17
      Vivek I've been hoping for one final destructive $ rally. But the fact that even in December with risk markets melting it didn't even move suggests that something else is in play. My guess and that of a number of my largest clients is that it is related to the PBoC's determination to hold USDCNY below 7.00 and then how they actively manage their reserves. I believe this process is essentially capping excessive $ strength and I don't see any change until at least the US/Chinese trade talks are completed.
  • HO
    H2 O.
    6 February 2019 @ 00:54
    HY bonds are having a great run this week. I agree with the cyclical thesis, but the timing in this piece (vague as it is) is off. Flows and improvements to financial conditions are providing a last gasp, and it might be longer than expected, i.e. until end Q1, with a lot of chop.
  • DB
    Daniel B.
    4 February 2019 @ 17:32
    Rauol states: "However, currently the junk bond market is only around $1.2trillion. Adding another $ 1trillion would probably need to wipe out 25% to 50% of the value of the mark-to-market value of all the junk bonds to make room for the new junk..." Can someone help me understand why classifying BBB debt as junk necessarily results in debt that was already rated as junk being reduced in value?
    • ST
      Shusaku T.
      5 February 2019 @ 19:24
      Basic supply demand. Downgrade BBB to junk and you'll double the supply of available junk debt. Unless you doubled the amount of money flowing into the junk market, the prices would need to fall.
  • VG
    Vivek G.
    2 February 2019 @ 04:06
    Hi All - looking for some help here. How does one get long into Eurodollars 2020/2021 that Raoul has mentioned owning? Do retail platforms allow this? Appreciate any insights from any that may have gone down this path. Regards Vivek
    • LM
      Lawrence M.
      4 February 2019 @ 22:02
      Try Interactive Brokers, I believe its a 10k minimum to open an account but, from my understanding, you won't be limited to specific investment vehicles as you would with a traditional brokerage firm. I have not used them personally but have considered them a few times, you can download their platform and play around with their trial account (not real money, you can trade whatever for fun).
    • TL
      Taylor L.
      5 February 2019 @ 14:29
      TradeStation also allows you to trade them, as long as you get approved for Futures - $5,000 min for a futures acct
  • EC
    Eleanor C.
    3 February 2019 @ 22:43
    Hi, overall great product/research. Some feedback - it would be useful to put up a flash update after FOMC and other regime changing events
  • VG
    Vivek G.
    2 February 2019 @ 04:03
    Hi Raoul, Julian A feedback for both - and I mean this in a constructive sense. There has to be some mechanism to have a bit of a dialogue with you - be it responses to comments we post or otherwise. Else i feel it dilutes the proposition; can you advise if this may be possible. You could consider limiting the comments from yourselves to our queries to say a week after the publication? Regards Vivek
  • TK
    Torbjorn K.
    1 February 2019 @ 15:54
    ISM PMI knocked in strong incl new orders. Also UMCSI came in better than the preliminary number from earlier in january. Would be appreciated with an update on the situation as these are vital numbers for the future of markets,
    • TK
      Torbjorn K.
      1 February 2019 @ 15:58
      XOM also came with surprising results and the stock is up 4% today alone
  • HT
    Henry T.
    31 January 2019 @ 10:55
    Actually it would be useful if Raoul or Julien put up a flash update after every FOMC meeting.
  • RK
    Roger K.
    29 January 2019 @ 10:55
    Thank you Gents! Raoul I want to short HYG ETF now. But it seems it's highly correlated with S&P500. Then again it seems S&P500 is highly dependent on FED's actions. This makes me indecisive. What is the best course of action ?
    • MB
      Matthias B.
      29 January 2019 @ 15:31
      hi Roger, to my understanding, the lending fee is very high for shorting it, would it not be better to buy a long dated put, the vola seems reasonably low. I would by put with at least Jan 2020 maturity
    • FD
      Fjodor D.
      31 January 2019 @ 06:17
      Slightly different underlying portfolio but very similar price action as HYG: JNK. The plus on JNK is that one can trade options on JNK and avoid substantial carry costs. That's not possible on HYG - at least on IB. And don't forget - when the s*** hits the fan - correlations are going to one.
  • MW
    Marco W.
    31 January 2019 @ 05:16
    Brilliant! I would act according to Julian's roadmap. Long 2 and 5 year bonds in anticipation of easing. At first sign of easing and infrastructure stimulus, play 5-30 steepening. With the breakdown of Chimerica, it is impossible to have the close coordination of the central banks and governments before 2017. But due to economic and political reality, zero coordination as of now is not sustainable. China credit cycle has turned up after stopping squeezing shadow banking. Doing that and fighting trade war at the same time, a time coincident with a few anniversaries, will be mission impossible. US credit cycle should turn up soon for similar reasons: recession is looming and election is coming. Ditto for Europe: recession, election and yellow vest.
  • CL
    Cyril L.
    29 January 2019 @ 21:59
    I understand the concerns about corporate debt, but given that equity is junior to the debt, why not simply buy equity puts? Shorting HYG with a significantly negative carry doesn't make sense to me when if your thesis is right (i.e. HYG sells off), the equity decline will be a multiple of that. Also, a lot of approximations. As Matthias B. mentioned in a comment below, the size of US BBBs seems to be c. $2.5T not $5T. 20% of that would be $500M, which would certainly put a lot of pressure on the HY market, and cause a re-pricing down. And where does the $2T figure for junk bonds, loans and CLOs held in mutual funds with daily liquidity come from? I don't know as well about HY, but less than 20% of the leveraged loan market is in retail mutual funds (and not all open-ended; that includes closed-ended funds as well). A significant portion is held by institutional investors, whether directly or through CLOs. These funds don't have daily liquidity, and institutional money tends to be much stickier anyway.
    • CL
      Cyril L.
      29 January 2019 @ 22:00
      Sorry left the first part of my comment incomplete. I meant to say that while the downgrade of $500B into junk would cause a re-pricing down, it seems more manageable than $1T.
    • CL
      Cyril L.
      30 January 2019 @ 23:10
      After verification, c. 25% of the US HY market is held in retail mutual funds.
  • GH
    Gary H.
    29 January 2019 @ 14:06
    It seems like Raoul puts very little effort into providing timely material for macro insiders? Material consistently over a month old by the time it appears. Maybe the view doesn't change but seems incredibly lazy for the fee for this service.
    • DH
      Dennis H.
      30 January 2019 @ 01:26
      I don’t know lazy. But it would be nice if he would explain why he is using last months data. He missed an 8.5% of the year
    • HH
      Hugh H.
      30 January 2019 @ 16:56
      The contents of meeting of minds are based on Raoul's latest GMI piece and Julian's latest MI2 piece. So it makes sense to me.
  • MG
    Miguel G.
    29 January 2019 @ 18:08
    Julian, your reference to 2016 is noted as central banks coordinated and were able to stop a recession from coming, but it came at a huge price as China launched a record setting stimulus package. I bring this up because your bullish scenario for equities would mean that we would have to see some level/size of easing comparable/if not bigger to 2016 in order to stop economic gravity this time. Is that a real probable outcome Im doing some assuming here but Id guess that the odds of China launching another stimulus of that size along with the rest of the world launching a big enough stimulus package to once again arrest the business cycle just seems unlikely, especially with economic data ebbing but still far away from getting numbers in the basement. I contemplate a scenario where central banks do eventually throw in the towel and try to save markets but I have to wonder if it'll be enough and a possible outcome to it just being shrugged off? Its impossible to know obviously but maybe, just maybe, we've entered a window where we could actually fade the fed and group think for that matter as most believe the fed can save us at any given time.
    • MG
      Miguel G.
      29 January 2019 @ 18:10
      Sorry for the long comment/question there's just so much to consider in today's market I have to keep stress testing all outcomes as no one really knows what the right answer is. I love your deep thought so looking forward to your response.
    • RK
      Roger K.
      30 January 2019 @ 10:57
      Miguel, I totally agree. All the data points to a recession/economic slow down but the everyone's waiting for the CBs action. That's is the thesis. So this makes us indecisive. In 2016 there were few things came along for the reversal of the market. 1. CB's liquidity 2. Trump package ( Cash repatriation, Infrastructure stimulus package, Tax cuts). This time around powder is little dry than in 2016. They still could go on 1. collective CB's liquidity 2. Hugh scale infrastructure projects in US and China; China has already started both. But whatever it is , one thing for sure, i.e. FED has to be dovish , this might helpful to Bonds. So I think only definitive trade is the Bonds at the moment.
    • MG
      Miguel G.
      30 January 2019 @ 15:29
      Well said Roger as you worded my concerns perfectly. In order to expect a throwing the kitchen sink at the market scenario we would need some kind of recessionary data would we not? Just my personal opinion but I find it extremely difficult for the fed to justify more stimulus at a time where we have extremely low unemployment, wage inflation and inflation meeting their mandate as well. We may be in store for a hawkish Powell today, just my two cents.
  • JK
    James K.
    28 January 2019 @ 19:29
    Julian & Raoul....Thanks for this timely pointed update to the current outlook. I also think the Fed will “cave” and stop any form of QT. Question where to hide if inflation does indeed kick up. What are your current outlook on Gold/Silver & also their associated mining stocks or ETFs. Also if ETFs do have potential future problems could that carry into the GDX, GDXJs, etc of the gold/silver miner ETFs ? Thank you in advance ....
    • JB
      Julian B. | Contributor
      28 January 2019 @ 20:29
      Hi James, my personal favourite of the two is silver (Gold/silver ratio very low, positioning in silver low etc) and I've advocated holding some precious metals for a while. That said we need to close above $16 i.e. back above a trend line off the 2002-03 lows to add, which should open us up for a move to $22 ish. We aren't there yet but I'm watching it closely. As for miners I'm not an expert but I'm sure some of our clients are and might offer advice.
    • MB
      Matthias B.
      29 January 2019 @ 15:40
      I would not play the gold / silver ratio, it feels (talk from personal experience) like a widow maker. I thought that a 2 STD away from a 10y average would be enough to short the ratio but wrong I was. Given the high correlation to demand patterns in electronics and photovoltaic, Silver moves along strongly (or at least did so strongly in 2H18) with Chinese macro patterns
    • BC
      Brent C.
      29 January 2019 @ 15:55
      James, my 2 cents. I'd have a look at the sprott gold miners etf's. SGDM/SGDJ. Not as heavily followed as GDX/J, so you can avoid some of the hot money/weak hands attention their size attracts. Also, a variation of Arnott's fundamental tilt in determining what/how much mining stocks they hold.
    • TM
      The-First-James M.
      30 January 2019 @ 00:51
      For those looking for something more specialised, i.e. LATAM and North American Precious Metals and Copper mining stocks, I found out about the following gent from a Bill Fleckenstein interview on the "Quoth the Raven Podcast". I subscribed to the IKN Weekly and it's been worthwhile and highly informative so far: https://twitter.com/IKN_Mark
    • TM
      The-First-James M.
      30 January 2019 @ 00:51
      For those looking for something more specialised, i.e. LATAM and North American Precious Metals and Copper mining stocks, I found out about the following gent from a Bill Fleckenstein interview on the "Quoth the Raven Podcast". I subscribed to the IKN Weekly and it's been worthwhile and highly informative so far: https://twitter.com/IKN_Mark
  • MB
    Matthias B.
    29 January 2019 @ 16:24
    question to Raoul on the exact size of the BBB market; the chart on p12 would suggest that the total market size is c$5TN of which BBB is probably around $2.5TN. But then the text underneath suggests that BBB is $5TN. so a 20% cut would imply $500m of BBB to junk, still big vs the overall size of the JB market but maybe with less of a negative impact as suggested?
    • MB
      Matthias B.
      29 January 2019 @ 17:47
      from a recent article from Jesse Felder, citing a FI analyst with many numbers on the corp bond market: US BBB was about $3.2TN as end of Sept 2018 or ca 50% of the total IG size; HY and leveraged loans were about $2.4TN with share of covenant lite in % of total US leveraged loans of c77%; historical US default rate avg (1982-Nov 2018) of 3.8% but went up to 9% 2001, 8% 2002 and c10% in 09.
  • HT
    Henry T.
    29 January 2019 @ 07:06
    This is more a technical question, so anyone can please help. I was looking at Raoul Corporate Debt to GDP % graph but when I go to St Louis Fed site I can't seem to rebuild the same graph as he did. Anyone has an idea how to get that graph?
    • MB
      Matthias B.
      29 January 2019 @ 15:35
      hi Henry, Jesse Felder recently provided a link for the same chart https://www.scribd.com/document/398229403/Risk-is-Where-You-Re-Not-Looking hope it helps
  • HT
    Henry T.
    29 January 2019 @ 08:00
    Another question, can retail investors buy High Yield CDS? Or is it only available to Institution investors. Thanks.
    • RK
      Roger K.
      29 January 2019 @ 10:53
      Couldn't find CDS on IB but HYG is possible.
  • AD
    Anthony D.
    29 January 2019 @ 05:28
    Raoul What your sense of the timing of the HYG demise, imminent? 3 months? > 6months?
  • KC
    Ken C.
    28 January 2019 @ 21:56
    Julian & Raoul once again great analysis and clarity, thank you! For us 60 and over investors what are or thoughts on how to invest our fix income portion of our portfolio's which for most of us is over 50% of our portfolio's?

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Morgan Creek Capital Management was founded in 2004 and currently manages close to $2 billion in discretionary and non-discretionary assets. Prior to founding Morgan Creek, Mr. Yusko was CIO and Founder of UNC Management Company (UNCMC), the Endowment investment office for the University of North Carolina at Chapel Hill. Before that, he was Senior Investment Director for the University of Notre Dame Investment Office. Mr. Yusko has been at the forefront of institutional investing throughout his career. An early investor in alternative asset classes at Notre Dame, he brought the Endowment Model of investing to UNC, which contributed to significant performance gains for the Endowment. The Endowment Model is the cornerstone philosophy of Morgan Creek, as is the mandate to Invest in Innovation.

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SkyBridge Capital, Founder & Co-Managing Partner

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MicroStrategy, Co-Founder

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TradeStation Crypto, Inc., Sr. Director of Product Strategy

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Other stop-off points on the way were NatWest Markets and HSBC, although he began his career by training traders in technical analysis.

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Avanti Financial Group, Founder & CEO

22-year Wall Street veteran who has been active in bitcoin and blockchain since 2012. In 2018-20 she led the charge to make her native state of Wyoming an oasis for blockchain companies in the US, where she helped Wyoming enact 20 blockchain-enabling laws. From 2016-18 she jointly spearheaded a blockchain project for delivering market index data to Vanguard as chairman and president of Symbiont, an enterprise blockchain start-up. Caitlin ran Morgan Stanley’s pension solutions business (2007-2016), heldsenior roles at Credit Suisse (1997-2007) and began her career at Salomon Brothers (1994-1997). She is a graduate of Harvard Law School (JD, 1994), the Kennedy School of Government (MPP, 1994) and the University of Wyoming (BA, 1990).

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Bitwise Asset Management, CEO

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FFTT caters to institutions and sophisticated individuals by aggregating a wide variety of macroeconomic, thematic and sector trends in an unconventional manner to identify investable developing economic bottlenecks for his clients. Prior to founding FFTT, Luke was a founding partner of Cleveland Research Company, where he worked from 2006-14. At CRC, Luke worked in sales and edited CRC’s flagship weekly thematic research summary piece (“Straight from the Source”) for the firm’s clients. Prior to that, Luke was a partner at Midwest Research, where he worked in equity research and sales from 1996-2006. While in sales, Luke was a founding editor of Midwest’s widely-read weekly thematic summary (“Heard in the Midwest”) for the firm’s clients, in which he aggregated and combined proprietary research from Midwest with inputs from other sources.

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CoinShares, Chief Strategy Officer

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