Pro Macro: In Focus – Cockroaches

Published on: June 14th, 2022

There is never just one cockroach. The fortunes of the Private Equity (PE) Masters of the Universe wouldn’t normally impact the lives of us ordinary mortals. Unfortunately, in another example of correlation, the recent collapse of PE valuations is impacting more mainstream strategies. Meanwhile, evidence is rising that our dream team policymakers are heading rapidly towards policy error. A dismal mix.


  • JL
    John L.
    14 June 2022 @ 18:06
    Adding to the short spx trade here seems very poor r/ I missing something? Thanks
    • JL
      John L.
      14 June 2022 @ 18:55
      Thanks Harry for the explanation
    • HM
      Harry M. | Real Vision
      14 June 2022 @ 18:51
      Color me impressed! You missed nothing and you are absolutely right that this is not our usual MO. Perhaps JB left somethings implicit rather than explicit in the text. Lets put it this way. We appear to be moving into "disorderly" markets. MI2 worships at the alter of risk and return, and selling 3800 to buy 3600/ or 4250 is not great risk-reward. But the price action is appalling, and highly suggestive of a broader based risk off. Everything is trading very badly. JB thinks it increasingly likely that we see discontinuous liquidity and sharp price drops in risk assets. Disorderly markets play by different rules, particularly if other holdings are exposed. 1:1 (at best) Risk Reward is poor, but we suspect the profit target can be rolled down along with trailing stops.
  • JM
    John M.
    14 June 2022 @ 20:03
    One of the few research sources I have found that provides balanced and comprehensive thought process.
  • YC
    Yi C.
    14 June 2022 @ 20:24
    Hi JB and Harry, I have a question for the real estate market and hope to get your opinions on. In my understanding, single family home prices usually lag the greater financial market by a couple months due to the process of selling a home is much longer than selling a security. Recently, home purchase applications are down 40% from peak. However, single family home prices in many areas of the US are still at historically high level due to supply shortage. If JB is right about the a secular long term bullish trend in bond yield, under the current financial condition and if my understanding about the market lag is right, does it make perfect sense now to cash out re-finance a single family investment home? This way, I can take advantage of the current valuation of homes, which will likely go back down following the the financial market or during the coming recession, and the relatively low mortgage rate compared to the future?
    • PP
      Percy P.
      16 June 2022 @ 00:43
      I am wondering if your lender will cap the maximum borrowing based on your monthly cash flow/income instead of current valuation. I suggest building some models to simulate the survivability and serviceability of your new mortgage at different rental income (as time moves on) and occupancy/vacancy rate. My other thoughts are: what if it took a lot longer to get to real dip (burning a lot of your monthly income to cover the initial stiff interest payment, for many months); What if it dip early but took a lot longer for your dip home to recover to a higher valuation, meanwhile witnessing your vacancy rate exploding higher.
    • YC
      Yi C.
      15 June 2022 @ 17:01
      Thanks for the feedback, Harry. Btw I love listening to The Next Big Trade podcast you host and your style of humor a lot! I am completely sympathetic of the view that it is the tightening of financial condition that will lead stocks to go down 30%+ causing a recession and rate will come down then. In that environment, I have a hard time believing home prices can stay up like it is right now. And I am curious if Julian has a price prediction model for US home prices and how it's looking to move with the impending recession. Hence, I am essentially faced with a now-never dilemma -- Should I cash-out refinance a rental investment home at a current all time high valuation (my area of home prices are making new highs as we speak) with a high mortgage rate both of which can come down during a recession? But again, it seems to be a supply shock issue as much as it is to many other inflationary items out there in the CPI. And so I think getting a second opinion from you and Julian on how the home prices may fare during the coming recession can assist with my decision making as I thought buying an addition investment home back in 03/2020 was a lousy idea and I missed the ride. As Julian rightly pointed out, cash is king in this environment. I just thought if I could cash-out refinance the high valued property now, then maybe when rate comes back down as home prices revert to the mean during this recession, I might finally be able to buy a housing dip with a lower rate with my refinanced cash as my Next Big Trade?
    • HM
      Harry M. | Real Vision
      15 June 2022 @ 11:28
      Don't think so, unless you plan to walk away from the home and think the valuation is too high. When you cash out refinance you are doing so at current rates. Those are super high. I don't mean to be a nag, but I know Julian nagged all of you to refinance at the lows in rates. I didn't hit the lows myself, but I did term out to 30s at good rates (sub 3 and 3.25) on my real estate (admittedly on low LTVs). If you didn't refinance, I can see this is not very helpful now and I apologize for not making sure this message was properly received. Is this a low mortgage rate? Maybe not compared to 18m ago, And how high will rates go? JB definitely thinks inflation will go higher. However no matter what the Fed does rates will not tame inflation. If inflation is going to be tamed its because financial conditions tighten. The Fed will do QT and stocks will go down, and cause a recession. Then rates will come down too. I know it's possible we are already in a wage price spiral which wont stop, but I don't think that's where Julian is. Rates may go higher in this cycle, but they wont STAY higher than current levels forever. Now, one caveat. JB can see how stocks collapse before we know that rates have peaked. You might think that having lots of cash available to buy stocks post collapse will make you much more than 2% more in interest costs on your mortgage could ever do. If that's how you are thinking, then congratulations! - you are a MUCH more aggressive trader than me. Good luck!
  • SS
    Shanthi S.
    15 June 2022 @ 03:01
    Thank you both! This was great. Amazing times we're living through...
  • AW
    Agus W.
    15 June 2022 @ 06:06
    Hi, when JB mentioned that gold is trading a policy error, does that mean he thinks gold is frontrunning Fed policy reversal ie to not tighten further? If so, would it be too soon in terms of timing based on JB's prolonged inflation view?
    • HM
      Harry M. | Real Vision
      15 June 2022 @ 11:16
      Gold usually trades well on high inflation (or the prospect of inflation). So, Gold trading badly implies that they think the Fed will over tighten and cause a recession. Frankly EDs show the same thing. Rates peak in June 23 (from memory). And breakevens are weirdly low if the market believed inflation was out of control. Of course, the latter might reflect lack of supply and a distorted market, but odd its the same across the curve.
  • RR
    Raj R.
    15 June 2022 @ 06:07
    How do you run a SPY/XME spread? Would u just sell SPY and buy XME?
    • HM
      Harry M. | Real Vision
      15 June 2022 @ 11:14
      Yes exactly. Work out entry and exit on the ratio. But own asset on a one for one risk basis trading spread.
  • RE
    Raymond E.
    15 June 2022 @ 07:11
    Julian has indicated that his recommended stops apply at market close. For DAX futures, when should we consider the market as closing? There is more than one time of day that one could argue as making sense.
    • HM
      Harry M. | Real Vision
      15 June 2022 @ 11:30
      Yup, a real issue, and one that has caused me multiple problems in my trading. If you are in a different time zone, you might have to set day orders and use daily closes or opens. Very difficult to monitor in real time. Frankly I have enough trouble trading my own US positions in US time.
  • MW
    Matthew W.
    16 June 2022 @ 23:00
    Is there an easy way to trade the DAX in US? Secondly, did anybody else close the SPX short once we closed below 3800 on Monday?
    • JS
      Julian S.
      21 June 2022 @ 22:42
      Hey…did you find an answer for your first question? Thanks
  • FN
    Fredrik N.
    17 June 2022 @ 11:16
    Any thoughts out there on how to go short the DAX through options instead of futures? I’m thinking of levels and timeframe.