Meeting Of Minds – September 2018

Published on: September 28th, 2018

In September’s In Focus, Julian returned to his Liquidity analysis and his framework for examining vulnerability in bubble stocks. He examined classic bubble patterns and highlighted Netflix as a candidate to short. This week he followed up with a Flash Update for Amazon. Meanwhile, Raoul re-examined his framework for assessing both USD and US bonds. He sees the current decline in the USD as a brief correction in a bullish trend but is hesitant to say the same about bonds as they are currently testing key levels on his “chart of truth”.


  • ag
    anthony g.
    28 September 2018 @ 14:09
    sounds about right.
  • RM
    Richard M.
    28 September 2018 @ 15:28
    Raoul/Julian, great pieces about "big picture" topics. Long term ideas to keep in the back of our minds as we try to play shorter term ideas.
  • RM
    R M.
    28 September 2018 @ 16:51
    Excellent, thoughtful pieces. Julian: The shift away from China may prove very advantageous to Japan, which will more tightly align with the US while offering competition to China across growing Asian markets. Japan also has no fear of robotics as their popultion is aging and capital is available. Thoughts? Agree Mexico and Vietnam will benefit long term as well.
    • HO
      H2 O.
      30 September 2018 @ 23:28
      I am somewhat more constructive about the coming Cold War because it is about competition to build infrastructure in proxy countries, which promotes trade and other forms of engagement to net our the negatives. The US (yes, the US) Europe, Russia and India are all thinking about how to build up their respective backyards, or those in their perceived spheres of interest, and this is much better than arming rebel factions (Contras, etc). There may be some of that, too, but I think the optimistic view is worth considering.
    • JB
      Julian B. | Contributor
      30 September 2018 @ 12:24
      RM I think you nailed the benefactors. If this deteriorates over time to a full pseudo Cold War world, I believe we end up dividing the world into friends, foes and third parties. India potentially into that latter group. My hope is she moves to the West and I believe she is already poised to win some major contracts at the expense of China.
  • HO
    H2 O.
    28 September 2018 @ 16:58
    For the chart on crude futures volume, can you post the bberg tickers please. Thanks.
  • MW
    Marco W.
    29 September 2018 @ 04:31
    Marvelous from Raul and Julian. One of the key conflicts in Chimerica is the AI bubble/propaganda. It gives infinite imagination and causes undue confidence and fear on both sides. The reports of huge AI investment race as well as revolutionary impact of AI appears in media from time to time (google "artificial intelligence magazine cover"). Then here is Spyos Makridakis's tweet ["When AI will reach the intelligence of a one-year old?” My own prediction: After a very, very … LONG time!]. Once the bubble burst, people will have clear and calm mind. After all, AI should be more about intelligence than speed. We mostly see information collection and (cloud) computing capacity buildup more than intelligence buildup. The cloud computing is quite similar to optic fibre in 2000.
  • SV
    Steven V. | Contributor
    29 September 2018 @ 18:25
    Long-term bond yields would be falling if not for the speculative short interest on Treasuries. QE caused short-term yields to fall and long-term yields to rise, which is easily seen by using the FRED database to chart 10-year Treasury yields against the Monetary Base. In the latter half of QE1, QE2 and QE3, long-term yields rose. In between, long-term yields fell. As the Fed engages in QT, short-term yields should rise, and they are, and long-term yields should fall, but they aren't due to the speculative short interest. If the Fed were to completely unwind their balance sheet, which they won't, they could drive long-term yields to zero for an extended period of time. What I don't get is why everyone thinks long-term yields have to rise. Clearly they don't understand QE/QT, our monetary system, or how the Fed broke the inflation-creating mechanism in our economy back in the mid-1980's. If the speculators are doing this to keep the yield curve from inverting, then I understand. Otherwise the speculators are fighting the Fed's unwind, which will lead to the biggest short-squeeze in the history the Treasury market and will validate RP's view.
    • TM
      The-First-James M.
      4 October 2018 @ 12:56
      I don't understand your assertion that QT should result in long term treasury yields falling. Surely by not being in the market buying via QE, one major source of treasury demand is not present. This implies potential for yields to rise, not fall. If the Fed are just holding treauries to maturity and allowing them to run off their balance sheet, i.e. QT, baring a surge in external (non-Fed) demand for new issues of longer dated treasuries, I can't understand why you assert that longer dated yields should fall under QT. What am I missing in your analysis?
  • RK
    Ryan K.
    30 September 2018 @ 02:21
    This is one of the best pieces I've read. It provides a backstory to help those of us who are newer to macro and lays out the current world we're playing in. I would love more pieces like this.
  • AM
    Anja M.
    30 September 2018 @ 13:50
    Both sections are truely enlightening! Concerning Roul's analysis of the situation in Europe and Germany's position within, I would like to point to the 'Agenda 2010', developed in 2003-2005 under Chancellor Schröder, which greatly supported Germany's economic development. Agenda 2010 is a series of reforms by the then German government, a Social-Democrats/Greens coalition, which aimed to reform the German welfare system and labour relations. The declared objective was to increase international competitiveness, promote economic growth and thus reduce unemployment. These policies were economically successful, albeit eroding the middle class and thus laying the foundation for the rise of AfD, the new nationalistic / right-wing political party. Other European states, such as France and Italy trying to adopt this strategy failed due to union's opposition.
  • MW
    Marco W.
    1 October 2018 @ 01:22
    One more affected sector apart from internet: financials. US is likely having service surplus with China (investment banking and auditing). One can check the IPO sponsors of mega Chinese companies listed in Hong Kong in the past two decades. The sponsors usually consisted of China and US banks. For example, CLSA, GS and MS in The recent Xiaomi IPO. Discounting the divorce could be part of the reason why Financials underperformed while interest rate rising. PS: a recent incident of China AI propaganda reported by South China Morning Times ( Quote: [It was an outright lie,” Wang wrote in his Zhihu post on Friday. “The day may come when AI can actually understand natural languages and we lose our jobs, but it’s definitely not now.”]
  • GH
    Gary H.
    1 October 2018 @ 14:02
    What's with the stale charts of 2,5, and 10 year rates? Looks like Raoul posted charts from a month ago?
  • AM
    Alonso M.
    1 October 2018 @ 18:17
    Nice work.
  • MB
    Matthias B.
    4 October 2018 @ 12:44
    as the 10y & 30y US yields have rallied through important levels (eg 30y now above the infamous 3.23%), is that now the rallying which would indicate the path to the next recession? if so, what is the historical context suggesting how far up it can go before reversing again (history does not repeat but it rhymes)? or is the current situation rather a usual seasonal pattern amplified by the dollar shortage that base swap and 3-mth forward hedging costs have substantially increased? I know many questions but I reckon that with yesterday's and today's yield move, we may have now entered a very interesting period
  • ag
    anthony g.
    4 October 2018 @ 18:58
    The current yield on the US 10 year Treasury is about 3.20 % . This takes it over the long term channel on the high side. Comments re earlier expectation of lower rates would be useful ?
  • BD
    Bryan D.
    5 October 2018 @ 06:25
    Great piece on the US China relationship at the moment. Its really hard to see how this gets any better before it gets worse as they both think they have the upper hand.
  • AP
    Alfonso P.
    5 October 2018 @ 13:53
    comments on interest rates and TLT would be useful
    • PC
      Paul C.
      22 October 2018 @ 09:30
      Hi Alfonso P, I'm currently short TLT. I'm loving the correlation between historical TLT v ISM: Prices Index - great leading indicator for TLT. Also chart the historical TLT v the 12m Ave of the Monthly rate of change of the Fed Funds Rate - again spot on correlation. If you chart them & also factor in the Fed's Dot Plot it suggests that the TLT will rise to test resistance at around the 115-1117 area until the end of the year. From then on, the charts suggests TLT should trend lower to test support of round 107 towards the end of 2019... Where the business cycle could break?