Pro Macro: In Focus – Relief

Published on: November 15th, 2022

Inflation has surprised to the upside for nearly two years. The first big downside miss triggered frenzied trading in Bonds, Stocks and USD at the end of last week. Was it justified and what to do next?

Comments

  • JK
    James K.
    15 November 2022 @ 20:25
    Thanks Julian ….
  • SN
    SAT N.
    16 November 2022 @ 00:04
    Top notch
  • JL
    J L.
    16 November 2022 @ 00:06
    Would love to hear your take on GBP structurally over the next year or two for us UK based viewers enjoying a bit of DM volatility recently. Thanks
    • HM
      Harry M. | Real Vision
      18 November 2022 @ 13:10
      You know, its funny you ask. We were discussing it in the office and our take is shifting. The UK doesnt have bad debt/GDP metrics so we have been quite skeptical of the "bad Truss budget killed the bond market" narrative. Truss had to go, but it wasn't cos the budget was outside the pale. The financial stability issues caused by LDI positions in swaps should have been addressed by a repo facility for pension funds. It now looks a bit like we are going to have an austere fiscal policy in the UK, and a relatively lose monetary policy to go alongside it. Great for UK property owners. Not so good for the currency. Obviously, whether dollar rates are higher for longer is probably more important for the evolution of sterling, but we can imagine a world in which UK austerity and high dollar rates put sterling in a chronically weak position. We are still gaming this out, and this is just a preliminary analysis, but we wouldnt be surprised if GBP doesnt extend recent gains.
  • AA
    Alberto A.
    16 November 2022 @ 03:51
    Excellent analysis and great suggestions as usual! Thanks.
  • SN
    SAT N.
    16 November 2022 @ 05:33
    If $ (dxy) were to strengthen, would that derail the gold trade?
    • HM
      Harry M. | Real Vision
      18 November 2022 @ 13:05
      It wouldn't help. But part of it depends on why the dollar were strengthening. If its cos rates are going up, then for sure. If its cos of a flight to quality, due to some geopolitical event then probably not.
    • MG
      Miguel G.
      16 November 2022 @ 19:06
      Thats an excellent point Sat I have no rebuttal. I feel much more confident about precious metals having made a bottom than equities.
    • SN
      SAT N.
      16 November 2022 @ 18:34
      But, gold seem to have underperformed in an inflationary env over the last two years. So going forward, if equities were to sell off, its conceivable that some of those funds might flow into PM. Not sure what the probabilities are, and how confident JB is with this trade. Shorting ITB, on the other hand, feels so right, given the 2007/08-like housing data that is rolling out.
    • SN
      SAT N.
      16 November 2022 @ 18:29
      I tend to agree.
    • MG
      Miguel G.
      16 November 2022 @ 18:17
      My opinion but I believe so. I like how Julian uses the dot com bubble as a potential road map. If were to continue to follow that script to some extent you will notice that gold and more so silver, particularly didn't really get going until equities bottomed as well. Metals found a bottom sooner than equities but silver just traded in a range until the next bull market started. I'm no where near as smart as Julian but gun to head my guts telling me to wait on precious metals as at best they chop sideways as Julian's next equity bear market leg trades lower. So to your point Sat being in precious metals here is tough because we know risk off means dollar gets that safe haven bid, but if I had to own anything it would probably only be precious metals. I think a buy point becomes clearer for metals 1H next year. Hopefully at that point SPX is materially lower and some real pain will come in to play. Thats probably when I set my sights on metals. Recession risk will be much higher and maybe at that point the dollar double tops/metals either double bottom or print a higher low (+ divergence)
  • ly
    lena y.
    16 November 2022 @ 16:44
    What is a good ratio of sizings in these new trades? BONDS VS PRECIOUS METALS! SLV has a higher beta than GLD, GDX more than GLD. How about TLT vs TIP?
    • HM
      Harry M. | Real Vision
      18 November 2022 @ 13:04
      Great question. I really dont want to do your statistical work, but the way I would approach it is the do a regression of the Bond etf vs the Gld ETF, but regressed on % changes not levels. Take a look at the beta coefficient you get, and use that for the respective sizing. You would definitely want to do a series of time periods to get some idea of what might happen in the best and worst cases. The less rigorous approach would be to do a little spreadsheet with a test position on it and recent data, and look at the daily and weekly PnL moves. This will give you an intuitive grasp of scaling.
  • AN
    Alexander N.
    16 November 2022 @ 17:29
    As a european who cant buy TLT. What is the best (if any) instrument I can buy to replicate this trade? Would ISIN IE00BSKRJZ44 fit as an answer to my question?
    • JL
      J L.
      22 November 2022 @ 12:54
      see this link https://www.justetf.com/en/etf-profile.html?assetClass=class-bonds&groupField=index&bondType=Government&country=US&bm=10%252B&from=search&isin=IE00BSKRJZ44#listing can use the website to browse ETFs
    • AN
      Alexander N.
      18 November 2022 @ 12:29
      J L: Will check them out, thank you very much for your answer :)
    • JL
      J L.
      17 November 2022 @ 20:25
      you've got the ishares 20+ treasury ETF IBTL (GBP) and IDTL (USD) in London and I believe they also exist on some EUR exchanges, should be identical to TLT
  • AL
    Alex L.
    16 November 2022 @ 18:46
    For a leveraged trade would you consider /ZBZ as the best futures substitute for TLT?
    • HM
      Harry M. | Real Vision
      18 November 2022 @ 13:01
      Carefully consider sizing. How big a position do you want in value per basis point? What does that convert to for a TLT?
    • JL
      J L.
      17 November 2022 @ 20:22
      judging by the respective volatilities it seems UB would be a closer duration match to TLT than ZB but maybe someone with more knowledge can comment
  • JM
    Jake M.
    17 November 2022 @ 15:30
    Hi Julian, the news just came out that FED's Bullard actually wants terminal rate to between at least 5.25% and maybe as high as 7% based on taylor rule. If that's the trajectory, are you still bullish TLT? 10 year - 3 month is already inverted. Can we see that much unprecedented inversion as TLT goes up while terminal rate goes 5.25% + at least and stays there?
    • HM
      Harry M. | Real Vision
      18 November 2022 @ 13:00
      I know that JB's position is that the Fed will want a restrictive monetary policy but once at an appropriately restrictive level, they will just keep it there for longer and allow the combination of elevated rates and QT to slow the economy. In the meantime the economy does seem quite likely to slow. Already seeing plenty of preliminary evidence of that slowdown in multiple areas. Particularly in interest sensitive sectors like real estate, the effect of monetary policy is highly restrictive and the longer rates are up here the worse conditions in real estate will get. Our impression is that the recent rally in risk assets is not helping the Fed. Monetary conditions are an important channels of monetary policy. So we were not surprised to see Waller and Bullard to out to push back against unrealistically dovish projections on Fed policy. When Chris Waller speaks we listen, because we know that Waller and Powell are closely aligned. The market reduced risk premia and as far as the Fed is concerned, they have done it too soon. I think Bullard's comments should be read in that context. Re inversion, I agree with you. The long end may want to rally on signs of increasing real economy weakness (which are still preliminary to be fair), but the Fed can restrain it. But if the economy does continue to weaken then eventually, long duration will work, regardless of what Fed governors say.
  • MW
    Matthew W.
    17 November 2022 @ 17:17
    So, with the 2nd buys lower in the bond trade, is he just saying *if* it hits that level, then buy a 2nd tranche?
    • JL
      J L.
      17 November 2022 @ 20:21
      that's right
  • RR
    Raj R.
    19 November 2022 @ 07:27
    TLT, GDX, Silver, ITB/DIA they are all the same giant trade. Why would one not stick to one trade than manage 4 trades that all reflect the same bet?
    • HM
      Harry M. | Real Vision
      20 November 2022 @ 12:26
      Well you might think you have a better risk reward in one or another. I feel like I missed the Gold trade. I think I should have bought below 1680, and that would have been a better risk reward than the closely correlated Long bonds trade.