The Waiting Game

Published on: July 22nd, 2019

There are times for action and there are times for watching and waiting. Now is the time for the latter…


  • HO
    H2 O.
    23 July 2019 @ 17:44
    Some major issues with this report. Wrt Treasury balances with the Fed, while clearly a surge in new issuance will withdraw liquidity from the system, the major omission here is that this balance has been cycling +/- $300 billion continuously, and US financial conditions have still be easing (and $ has been range bound). So the idea that this is a game changer is misleading at best. The Fed will also probably stop shrinking the balance sheet in Q4. So if you look at a time series of the combined net change to the Treasury balance with the Fed and the Fed balance sheet, the total liquidity effects should ease, not tighten. Add in expectations for rate cuts (2 or 4, it doesn’t matter) and the prospect of a standing repo facility in Q1, and it seems pretty clear global USD conditions will also be easing in the next 3-6 months. The latest beige book, for example, implied as much. For the dollar, the idea that the dollar has had every reason to fall and hasn’t is just as true as the statement that the dollar has had every chance to break to upside but hasn’t. It is just poor reasoning (in either direction) to propose that just because A hasn’t happened, that somehow B is more likely to happen soon. An important qualitative reference point to keep in mind is that no major instance of a trade conflict or tensions has ever resulted in a stronger dollar. Finally for ECRI, this a used and abused indicator. Even the head of the organization is on record recently as saying that the US economy is not yet late cycle. Looking at the series, recent data and anticipating the impact of a big positive balance sheet shock in the US from the equity and bond rallies, there is nothing to suggest that this “rolling over” will be different from the last 4 instances this cycle and cause the ECRI (and better indicators) to break through a pretty stable range to the downside. Doom loopers are quite vulnerable to confirmation bias.
    • AM
      Artur M.
      24 July 2019 @ 14:26
      Always good with some constructive criticism, but we have to remember that we all are biased. I appreciate Raoul's macro experience as timing is here everything. When talking about dollar shortage we need to at least separate the US dollars and eurodollar system synthetic "dollars". There is a large shortage of ED dollars but this has not translated into change in FX. Why? For sure, CBs know that high dollar is bad for financial stability, so you have open swaps between big 3 CBs since GFC and I would not be surprised if there are some mechanisms in place from FSB formed after GFC to help this cause. So this time it may be a case that dollar goes higher after everything else falls apart. It will basically not be reflected in FX as leading indicator. However you can't get around ED shortage easily. You can see in TIC data that Non US CBs are rising liquidity by selling USTs. When this happened last time rates were going down even if all were screening 4% next for UST (incl. Julian). The reason is that USTs are the finest collateral and best insurance for liquidity shocks in ED system so every institution World Wide buys it to survive the next day. My conclusion is that 1) Dollar matters but which dollar? ED dollar 2) Yields will most likely continue lower even if DM FX is where it is. China has been frozen out form ED system so they are in big trouble and could upset FX, but the big 3 & FSB are managing the FX and you can almost smell it on the charts. Also referring to Milton F. and interest rate fallacies. Rates lower means liquidity is tight. You would need to inject Trillions into ED system to revers it and quick as ED system started to break after GFC and never returned to normal. DB is paying high price sticking out it's head and betting on CBs reflation narrative.
    • BC
      Brent C.
      24 July 2019 @ 19:45
      speaking to this quote specifically: "Finally for ECRI, this a used and abused indicator. Even the head of the organization is on record recently as saying that the US economy is not yet late cycle." unless my reading & listening comprehension as completely gone by the wayside, Lakshman has made no such comment. Quite the opposite.
    • HO
      H2 O.
      25 July 2019 @ 02:35
      Let’s see what GDP says yo.
  • RP
    Raoul P. | Founder
    23 July 2019 @ 15:58
    The dollar is getting very close to breaking out... HUGe move in Euro today. If this conforms, then the BIG trade of Buy Dollars, Buy Bonds, Wear Diamonds will set up perfectly...
    • MG
      Miguel G.
      23 July 2019 @ 18:58
      And short equities : )
  • JQ
    JACK Q.
    23 July 2019 @ 08:50
    Raoul - can i get your thoughts on steepener here? in your scenarios given on FED cut, if market gets disappointed July 31, do you see a case for more steepening or flattening?
    • ZW
      ZH W.
      23 July 2019 @ 12:20
      I'm very curious in this, too. Historically, yield curve steepened after Fed started cutting rates. Even in 1995, 1998 "insurance cuts", curve also steepened initially. I'd like to know your opinion if this time would be different.
    • RP
      Raoul P. | Founder
      23 July 2019 @ 15:57
      Love the steepener.
  • AM
    Artur M.
    22 July 2019 @ 13:55
    Thanks for the update, was waiting impatiently for it. Did you keep the ED Dec 19, call @98.0 / put @98.5? I still hold it, but if we have any deeper correction then all the profit is gone. Sold other positions. Thx in advance
    • RP
      Raoul P. | Founder
      22 July 2019 @ 20:46
      I am still long that trade. We have until year end which Im very comfortable with for now.
  • lD
    lance D.
    22 July 2019 @ 17:09
    Can somebody help plz I'm looking for a few foreign industries that have potential to move with an appreciating USD Japans Logistic/Transportation, Chinas Medical distributors, China Wholesale Distributors and Hong Kong Wireless Technology Companies that i can trade i've been googling FOR OVER an hour and have only managed to find Lenovo, bei gene ltd & zai lab . anybody got any more to add to this ? Cheers
    • lD
      lance D.
      22 July 2019 @ 17:28
      Never mind the wife got cheesed of with my 'huffing and puffing' and found what i needed in 10 mins flat FFs
  • BH
    Bin H.
    22 July 2019 @ 15:44
    I am not sure how superior ECRI vs other leading indicators. Suggestions and comments?