The Tactical Non-Consensus Trade

Published on
April 11th, 2019
17 minutes

The Tactical Non-Consensus Trade

Investment Ideas ·
Featuring Charlie McElligott

Published on: April 11th, 2019 • Duration: 17 minutes

In the last few months the Fed has aggressively changed the direction of its rhetoric and policy, but what does that mean for investors? Charlie McElligott, managing director of cross-asset strategy at Nomura Holdings, discusses the March "Fed Rate Cut Panic". He says it caused the rally in U.S. fixed income to overheat and created a bearish narrative on a potential recession. This may present investors with an opportunity to fade the consensus "slow-flation" story and reallocate assets accordingly. Filmed on April 8, 2019 in New York.



  • AM
    Artur M.
    3 May 2019 @ 23:25
    could you explain in more detail: 1. curve cap 2. bull and bear steepener 3. negatively convex assets 4. negative convexity
  • RP
    Ritin P.
    20 April 2019 @ 16:10
    Probably the most information packed video I've seen in a while. Loved hearing the intricacies and thought process behind the curve cap trade.
  • RX
    Robert X.
    15 April 2019 @ 11:09
    Charlie is super well informed . 31 dislikes? Crazy - nothing wearing your bond proxy trade on your sleeve.
  • JH
    Joel H.
    15 April 2019 @ 03:05
    Definitely would love to see him come back.
  • PP
    Peter P.
    14 April 2019 @ 22:33
    Great job Charlie & great to see you on RV. I realize you have a set horizon for your inflections & trades, and if facts change I know you will adjust, as the pendulum swings back, but thoughts The Fed is fully politicized now, and not really independent, so allowing inflation to “run hot” (even if they could engineer that & they can’t), and buying up the short end of the curve would raise interest as a cost of the Govt budget, plus the fact the Fed plans to not reinvest in mortgages means mortgage rates should move higher (and housing chokes quickly on higher rates) - so Wall Street is not the one driving the bus, but the little homeowner as always - soFed talk is cheap, and aside from the fact that Fed is clueless as to 2nd order effects of their policies, they reverse/revise everything they say they will do/accomplish. The next QE likely to be people’s QE, think the Congress is done contributing to Jamie D’s 30mm+ annual pay for doing nothing. This might get expressed as TNB USA winning its lawsuit vs Jay Powell, and all Americans doing a run on money market funds & bank CDs, or the eventual nuclear option where we all refinance our homes at & again bypass the Wall Street IBs - who will really have nothing left to do or offer society except finance for the few elite HFs that individually borrow tens of billions from the money center IBs. All global debt in the aggregate at this point is deflationary, and for inflation to occur, you need labor to get a larger share of profits from corporates in order to pay up for goods (inflation) - which corporates will then look to automate a greater % of their employees. In the words of Dana Carver as Bush 41 on SNL “Read My Lips - Not Gonna Happen”
  • SL
    Seth L.
    11 April 2019 @ 20:01
    Great stuff. I still am skeptical that the Fed has anything to do with inflation. See Japan and this paper ( for evidence. Doesn't invalidate anything discussed in the interview. Perhaps makes them more strategic than tactical ... sadly.
    • DR
      David R.
      12 April 2019 @ 09:13
      US is not Japan, whatsoever. Japan's debt is owed to itself rather than foreiners, it's a more harmonious, stoic society that most importantly entered its lost decade with massive savings surpluses. In contrast, most Americans have virtually no savings. US is the biggest debtor nation in human history with deficits (including the all-important off balance sheet items it hides like pension and medicare obligations ..... if any company accounted like that, all their execs would be in prison!). Japan was able to export because the rest of the world was in okay shape, unlike today. The US position is absolutely terrifying compared to what Japan went into.
    • mb
      michael b.
      13 April 2019 @ 16:54
      As far as monetary policy is concerned, it's hard to disagree that US is going down the Japan road. There are some significant differences between the Japanese economy and the US economy. Export-based, high domestic savings, and not the reserve currency vs Import-based, low domestic savings, and reserve currency. Both are under a massive debt overhang. When the domestic real estate bubble burst, many Japanese were sitting on 50+ year mortgages. Stop and think about that for a moment. Their "harmonious, stoic" honor-based society's rules prevented them from foreclosing. The bad loans never cleared and they've been trapped in deflation ever since. A society trapped in debt with a fear of loss will park their money (pronounced "future mortgage payments") in local government bonds, hence the high domestic JGB ownership. Japan had the flexibility to take extraordinary measures to weaken the yen and inject money, and they've had some success doing that, it seems. The US would have real complications devaluing the USD since our Fed cannot regulate the global dollar system. I have some real concerns about the "yeah, but Japan's debt is locally owned" argument. I don't understand how that matters, frankly. Debt that cannot be repaid will eventually not be. Wouldn't you want a foreign entity holding the IOU's that you can't pay, rather than your uncle across the street? Debt is future income pulled into the present and spent. The unwinding of that is future work or asset sales where the proceeds are forfeited OR future default. In the case of payable debt, this would be a wash for Japan. But in the case of unpayable debt, it would mean the government would essentially default on its own people either outright or through money printing. I can't see how this is preferable to defaulting on foreigners. Can I also make a quick argument against the idea that Japan's households have any real savings whatsoever? Suppose the Japanese citizens suddenly decided that they all wanted icelandic widgets. Scenario 1: they all individually pay out of their savings to buy widgets. Net effect, every household has a widget and less financial assets. Scenario 2: the government purchases a widget for each household, issues bonds for the purchases which households buy, and now every household has a widget AND their total "assets" are unchanged. Magic! Let's all push for scenario 2 for everything, right? Wrong. If the government acts on behalf of the households it governs, it follows that both govt assets and govt debt are extensions of the assets and debt of the households that it governs. It would then follow that Japanese government debt IS the debt of every Japanese household. It would then have to follow that a default would wipe out the "assets" of many Japanese citizens rather than some foreign bank or hedge fund. I can't see this as a preferable scenario.
  • XF
    Xavier F.
    13 April 2019 @ 03:05
    This guy is great, I agree with him too. Just sometimes its hard to follow him, he gets a bit wordy with the technical talk. I particularly like the fed letting inflation run hot comment !
  • CM
    Christopher M.
    11 April 2019 @ 12:40
    Uuft! That feeling when someone with a much larger brain than you lays out the exact opposite of how your portfolio is set out for the next 6-12 months.
    • PC
      Peter C.
      13 April 2019 @ 01:54
      Your not alone lol
  • DR
    David R.
    12 April 2019 @ 09:02
    USD could be finally starting its major breakdown as it's tumbling to multi-week lows even against the beleaguered Euro. USD has already collapsed for months against many EM FX except several of the basket cases. AUDUSD, often seen as a "commodity currency" or Asian proxy, is barely contained as AUD is breaking out of its multimonth range to the upside. Bitcoin is up 60%. Precious metals are strong overall this year against the weak dollar. The widening breakdown of the dollar warns of a major collapse in the dollar is in the works. Which can propel nominal prices higher for commodities and stocks, although the best stocks are to be found outside the US as US growth is in a serious slowdown, if not recession, and US corp earnings seem likely to fall. Technically, the corrective recovery in the dollar price since 2018 has been a choppy 3-wave advance. That followed the dollar's big 20% plunge from Dec 2016 - Jan 2018 which was in an impulsive 5 waves. Historically, everytime there has been a 5-wave plunge followed by a 3-wave recovery, the next move is another 5-wave plunge to lower lows. That is almost certainly the fate of the dollar ahead: Another major 5-waves down into the 80's on DXY. The USD is likely to do even worse against many other FX not included in the DXY, which is an extremely outdated, flawed index being weighted 65% Euro in an era when Euro is just a fraction of the size of Asia's total economy today.
    • ly
      lena y.
      12 April 2019 @ 19:48
      Oil is up! Gold is up! China, Taiwan and Hong Kong markets have reversed!
  • JL
    J L.
    12 April 2019 @ 13:53
    could do without the music when someone is talking
  • CH
    Colin H.
    12 April 2019 @ 11:09
    Everyone has gone with this dude is smart AF in the comments. No doubt. However, I'm going with "cool beard".
  • LS
    Lincoln S.
    12 April 2019 @ 03:39
    Agree 100%. Short fixed income, yield curve steepens, buy commodities. Inflation is coming, and the Fed is going to let it overshoot.
  • gg
    georgy g.
    12 April 2019 @ 01:50
    Really super interesting. Would love to explore the idea of fed policy shift to average inflation more
  • BH
    Bin H.
    11 April 2019 @ 18:37
    He said "In couple of months, Fed will be buying bonds again". Why?
    • JM
      John M.
      12 April 2019 @ 00:57
      Fed announced they will cease QT in September... At which point, as their mortgage portfolio continues to roll off they plan to reinvest the proceeds in shorter term treasuries. So, they won’t be growing the balance sheet in aggregate, but as Charlie said they will be actively buying bonds.
  • DH
    Daniel H.
    11 April 2019 @ 19:53
    Great interview. Thanks.
  • SH
    Sebastian H.
    11 April 2019 @ 16:30
    I’m sorry but this is just an overhyped reversion-to-the-mean trade. Obviously the growth stocks and defensive stocks that have run up due to the pullback in treasury yields are going to take a break and consolidate. Correspondingly, the cyclicals that haven’t participated as much in the rally are going to receive a sympathy bid. The whole bet on this “soft landing” or reflation trade is already becoming crowded and frankly is risky if the PBOC and Fed don’t become even looser on monetary policy.
    • DS
      David S.
      11 April 2019 @ 18:05
      You are correct, but all trades are risky. If the Fed and PBOC do not become looser, reverse the trade. This is a reversion-to-mean with reasoning; well-developed and openly discussed. I made a couple of adjustments and will see how it plays out. I would like to see more presentations like this. DLS
  • lD
    lance D.
    11 April 2019 @ 17:36
    loving this ed harrison bloke and the series more of Mr Mcelligott please and more of this detailed tactical approach . thanks guys really enjoyed this complements the MI pieces too.. awesome
  • rr
    rlw r.
    11 April 2019 @ 16:05
    Yep, more Charlie please Thanks RV for finally having him on
  • DP
    David P.
    11 April 2019 @ 15:08
    Great interview questions and synthesis at the end...
  • WB
    Wes B.
    11 April 2019 @ 13:57
    Scary feeling when you see a well articulated view that runs counter to your whole portfolio...
  • RM
    Richard M.
    11 April 2019 @ 13:54
    I really like this new Ed Harrison series! Very clear and concise info and great guests so far. Looking forward to future segments!
  • PW
    Philip W.
    11 April 2019 @ 13:38
    Awesome! Makes a lot of sense.
  • Nv
    Nick v.
    11 April 2019 @ 09:47
    Interesting and well articulated