I am also very eager to hear more detail on Julian's Bund/DAX view and how best to play this.

I'm curious to see an answer to this, but my assumption as a Gen Xer is that we are going to carry the initial (confiscatory) load of the pension and government defaults, as we will be in prime earning years.

I was thinking very much along the same lines with Artemis Vega. Sizing is my challenge. How did you size it? How many dollars in Vega per dollar of long US equity and how much damage would it likely mitigate?

Thanks James. We'll take this on board.

Hi Hot M (really ???) Anyway we are aware there are a lot of people in your camp. Indeed, it was investors like yourself that we had in mind in our discussion on bubbles, EM and risk parity. These are topics that cover excesses created by ridiculous central bank policies and all look ripe for correction. Hence, our suggestion not to actively short but to start reducing some risks.

It was a handle i hurriedly pulled out of my proverbial when i was in 2 minds as to whether I would subscribe. Hopefully it sticks :D. Cheers!

Hi Anthony Well if do end up playing "thermos nuclear war" it may all be academic. However, at the end of the day it was going to be something that triggered a risk off event. Markets have simply become wound too tight and risk premium are none existent i.e. bond vol at 30 yr lows. Hence, our suggestion to reduce some exposures (see comment above to HOT M.) Personally, hoping that a risk wobble now sets us up to short some bonds but we will see!

thanks ..... it is getting interesting out there. Just read M. Lewitt's latest Credit Strategist edition dated 1 Aug. hmmm.

you might want to see George Friedman's ( GFS ) views on N. Korea. I get his stuff and might say it is very interesting. John Mauldin is a big fan of GFS for what that is worth. etc. best,

sorry - it should read GPF not GFS . Apologies.

Paul G. Just posted in Twitter @julianMI2 a comparison between Amazon and Microsoft in 2000. Back then MSFT fell almost 50% in 5 months and most of that in 8 weeks. I think Dec puts are perfect as they give you time for the move without killing you on time decay

Neil, Greg Wheldon had a similar view on the Shanghai Comp. I have a very simplistic view on things, but I see quite a few markets at junctures eg, Hang Seng index back around 28k (got to this level before a break to 18k early 2016 - which is not far off an all time high 32k 2007); AUDUSD at or breaking 77.2c/80c level; GBPUSD early to mid 30s. So Raouls by the end of the month comment is quite pertinent. One of the problems I find I have with myself is I cant wait to FFWD and find out which way things fall, and end up taking a position in no mans land and then having trouble taking positions (or closing them) when things do fall one way or another. Sounds like 'hang on' is the advice presently.

Michael my works suggests MUCH more rapid inflation/growth picture into H2, which will blindside both the ECB and markets I'll discuss it soon in an In Focus

Definitely. It will feature. It is not centre of our current thought processes right now but is always part of it.

Thank You! China is so difficult for a retail investor to evaluate, but China does have such a global impact.....

I hate to ask Raoul & Julian for their thoughts on a long transcript but if you have a moment sometime & think it is germane please share. From Anne Stevenson-Yang's podcast with Brian McCarthy as it relates to RMB & USD - https://www.jcapitalresearch.com/ TRANSCRIPT (90% of the conversation) as it is germane to the discussion at here. Quote BEGIN > Brian: China capital flows move inverse to the dollar. When the USD is strong the pressure on China's capital account is greater. When the USD softens the pressure on China's capital account lessens. The pattern has been evident the last few years. November/December 2016 (wake of US election) the USD sharply rallied for a couple of months and just like that the outflows from China picked up to $40 to 60 billion per month. Like 2016 China enacted policies to alleviate that circumstance BUT then the USD weakened. So we don't know which has reduced capital flows. Reserves Rising? …the foreign assets in RMB terms gives a better sense of the flow out of the reserves. It has been small single digit negatives for the last few months… better than it was late 2016… BUT the headline reserves rising now are a function of the revaluation of their USD assets to some extent (and some degree of fudge), such as the mark to market of their assets if the PBOC where to sell a fixed income that is at a premium and roll into a fixed income security trading at par, they can harvest that premium because the assets are marked at book value. Path of the dollar is key will determine how long the PBOC has… AND whether China itself will create a stress event by sanctioning some credit event which could unleash problems in the domestic credit markets. Now trying to unwind a $300B insurance company because of some mysterious political prerogatives could end up being that event. 1 [Anbang Insurance company] … Measures… in late 2015, early 2016 when China was under a lot of pressure they were intervening in the USD/CNH market . So they had to control both the onshore & offshore rate. The intervention in the USD/CNH market through 2016 was very expensive. Early 2017 they changed tact. So they are no longer using reserves to control USD/CNH they are allowing interest rates to do that. So there have been a couple of instances of 40%, 50%, 60% in overnight rates in CNH and this is not an environment where someone can afford to be short a currency where they are paying 40% to 60% each night. Further explanation… the first thing they need to do to make this new rates defense of CNH work is to cut off the flow of RMB from onshore to offshore. Because if onshore rates are at 1% or so and offshore rates in CNH are 10 times higher everyone in China will want to move money and take advantage of those rates, so that needs to be cut off by not allowing remittances from onshore to offshore. So when you disconnect the arbitrage from the onshore to offshore rate it is now very simple particularly in that the pool of CNH has shrunk dramatically in the last couple of years it doesn't take much for them to trigger a liquidity squeeze in CNH. They just have some banks execute short-term USD/CNH forwards which withdraws spot liquidity and they can push short-term interest rates wherever they want them as long as they have disconnected the arbitrage. Step one cut off flow of RNB from onshore to offshore and then whenever the CNH misbehaves instead of having to spend reserves to knock the market back in line they just engage in some open market operations via Chinese banks and drive the rates to the moon which cuts out the shorts. This is a unique situation in the classic currency defense situation. This is the sort of thing that is considered untenable. How did Soros blow up the pound in 1992? They were trying to defend the pound with 14% interest rates and he made the assessment that that was not going to be politically tenable for long. But in the CNH case there's no real domestic cost to that but there are costs though. The Dimsum market will be destroyed. It renders CNH unusable as a hedging vehicle so anyone who wants to invest in Chinese assets and wants a readily available liquid hedging vehicle CNH is not effective since rates can go to 100% you can't roll your hedge. If you have RMB rates in say Hong Kong at very elevated rates for an extended period of time say 10 -12% in a one month deposit a lot of people in China are going to be sitting in a 1% deposit onshore being discontented. So PBOC has only been willing to utilize this tool for 2 to 3 days at a time and then they back off, but it does allow them to push the CNH around without using reserves as they were doing last year. Anne: PBOC came to conclusion a year ago that offshore RMB market was a mistake and they want to retract it. The pool of offshore RMB has declined a lot. But there is still demand for regular old USD. Offshore RMB is not the only window on hard currency so if you eliminate the offshore RMB still why are you not getting more capital flight through property purchases & trade account… Brian: So this offshore RMB is one window that they have closed at the cost of destroying the CNH market and at a reputational cost of "RMB internationalization fantasy" which no one believes is going anywhere at this point. ONSHORE They have taken measures to reduce the need use reserves to control the onshore rate as well but they're extremely damaging. There is a lot of evidence that they have given the local banks quotas on the availability of foreign currency. Early in 2017 the quota was net zero. ICBC or Bank of China you can allow a client to buy USD after someone sells them. Anne: It's regional. There are some regions where it is net positive some where it is net negative. But nationally it is suppose to be net zero. Brian: So you end up with large institutions having the ability to regulator shop. You go around and find the city with positive quota and get a piece and you can move some USD. But to stress… this is a non-stress scenario on the USD now. So everything should be gravy for China now. Emerging Markets are ripping, everybody loves risk, the USD is weak, global liquidity conditions are very benign. It is a perfect external environment and still they are having to use these measures. I'm hearing stories of corporate treasurers of US and other multi-nationals in China who tell people they are literally in line at SAFE to get USD out. If USD isn't really appreciating against anything else you wait in line and don't cause a stink. If the USD starts strengthening the situation begins to matter. So I don't think the quota system will be effective in an environment where the USD is strengthening which increases the perceived need to get USD. This quota system has already done damage to China's reputation as a destination for inward investment. MSCI came up with workaround to let connect eligible stocks in… so China will get maybe $12 billion of inflows a year from now. The PBOC can spend that in a good day if USD/CNH and USD/CNY are under stress. It really isn't a dial mover. Prospects for the USD Anne: What is the likelihood of a stronger USD, considering that we probably aren't going to get another raise this year & maybe not next year. Brian: The last hope for China top avoid a big decline in the RMB while also trying to control this credit bubble that Chinese policy makers probably feel is getting out of control is to get to the next Fed easing cycle. RMB is an insanely convex play on USD strength. 2 Paths: - Post November - China could take some pain, reset the system, halt some egregious value destroying activity - Paths are so broken that they can't take any risks to put the economy on a sound footing so they'll fight everything, the weakness in the currency, any emergence of credit risk, any slow down in growth, Credit markets are compounding very large numbers at very large rates, if you tally up the implicit guarantee what is holding up the financial markets up is the pervasive belief that the govt will take care of it, that no matter what happens in the end the govt. will figure it out. But you tally up the size of China's credit market, the value of the residential housing market… it is too big to bail things out in real terms. They could do it in nominal terms if there is no constraint on the PBOC's ability to print. But the idea that they can close the capital account , print as much as they want, keep it all bottled up in ever increasing Chinese asset prices while still engaging in global trade to the tune of $2+ trillion in & out is impossible. Anne: Sounds to me like there are two paths: One, is to wait on what happens to the USD and ultimately the cycle returns and this is probably early next year when China's goose is cooked all other things being equal in the US. Two, is a slow deterioration in China's growth & quality of living, lesser exports & imports… wind down in activity. Which is something we have been seeing since 2014 or so. The thing that has surprised me the most this year is the really dramatic pickup in the materials markets and housing construction and housing prices. So we are back up to the kinds of level of 2014. There's been growth in the first half of the year. The property prices are higher & the property growth is higher. Its 100% policy driven. Policy directives that they double the pace of construction in Q1 and all the influx of money for building social housing. Brian: They can engage in this activity as long as it can be funded. Ultimately it is being funded by the PBOC via a policy bank to a local govt. It is this liquidity creation that is causing the currency stress. But we just don't see a lot of stress when the USD is weak. You have to be in really, really bad shape for your currency to be exhibiting weakness against a weak dollar. Although that said, we do see this. This is why they had to intervene, there was a big episode of USD/CNY intervention. A big spike in USD/CNH rates in mid-May early June. In mid-May we saw a series of USD/CNY official fixings that were much lower than they should have been based on what everyone was told the fixing methodology was going to be - So you look at yesterday's close onshore, what did the USD do over night, make an adjustment and that is your fixing. So they abandoned that methodology and in mid-May told the market we think the RMB should be stronger… so the PBOC every night was watching the USD weaken against the Euro & Yen… they would come in in the morning and say "we think the USD should weaken against the RMB too and they'd fix lower. Day after day the market would say "No thanks if there are USD available we want them." Problem with this quota system is you create a pent up demand for USD. If you are in line for USD you take them no matter when without regard to price. So the market was not responding to the PBOC signal that they were displeased with the optics of the RMB not being able to rally against the USD when everything else was rallying against it. So they said they were adding a counter-cyclical factor to the mechanism which means they are going to do what they want with the fixing again. But the market didn't really respond to that, but they responded to the increase in CNH rates to 50% overnight and caused a serious short covering in USD/CNH and the PBOC spent some billions of USD whacking USD/CNY onshore so they gave the mkt a little spanking that lasted 3 or 4 days around the turn of the month. Now we're right back in the same situation where if they're not actively managing the onshore exchange rate it just ticks higher. The market wants USD now irrespective of whether the USD went up or down against the Yen or Euro over night. Anne: They are using the USD scarcity to control the market rather than spending down USD. ...

Anne: What do you think is in the reserve… do they really have $3 trillion to defend the RMB? Brian: Our assessment is that something on the order of half is reasonably liquid in Treasuries, Bunds & JGBs, the rest is less liquid equities, private equities, dollars lent to other entities in the Chinese govt. who have on-lent them to people who are not going to pay them back. Most lending via China Development Bank to emerging markets in Latin America & Africa was ultimately funded out of the PBOC reserves… So those USD are not accessible. SAFE has invested in private equity… potentially round-tripped back into China. They give private equity such as Blackstone or Carlyle or PBG USD to do private equity and have them reinvest that money back into China. Signposts I - High profile credit event would unleash huge problems that would rapidly put pressure on PBOC to provide abundant liquidity. Anne: You think Anbang could be one of those, invested as it was in 12 large domestic stocks? Brian: I don't know much more than anyone, but I do know it must involve serious Chinese politics because this is not the kind of thing they would do just for the heck of it at this point in time. You already have Chinese inter-bank markets, money markets and credit markets very nervous simply because of the regulatory & monetary tightening in the pipeline. So to throw this sudden potential unwind of a $300 billion insurance company into the mix, they wouldn't do that lightly. Anne: HNA and WANDA Properties are now in the mix as well. I think it is simply about stealing money and bringing it overseas. You look at the hugely over-indebted entities like Evergrande and Longfor and the other property companies and instead of being sanctioned for their random or rampant money gathering, they're being encouraged to gather more capital and come onshore to list. It's just the insurance companies that are extracting a lot of assets and buying stuff overseas . Brian: A couple of issues with that theory… First the companies you mentioned have accumulated $15 billion in overseas assets over the last several years. This is peanuts in the Chinese credit system. So it isn't dial moving amount of money in terms of capital outflows … AND in terms of flow this was hot and heavy last year much more than this year … it has sort of subsided… There might be concerns that these billionaires have a parachute.. That could be the political imperative. I'm skeptical that this is policy driven… II - Next period of USD strength will create larger reserve losses. They spend $1.25 Trillion last stress period back to Aug 2015. The PBOC would have you believe that it was $750 billion but… Now stress periods will go to $50 -$100 billion per month . I think they could do that for another iteration but probably can't do two more iterations. III - Combination of fiscal & monetary policy at the end of 2017 …significant tax cut in US.

You might want to check out QID. I think they have a nice risk-reward on put spreads. But you'll need to watch out for the negative roll. Maybe put the spread on when Congress comes back from recess and the debt ceiling debate fires up.

Heini B. I'll run the algorithm, which we use for classic bubbles and post the list tomorrow. I'd also like to make the following observation. Its very hard to catch the top in one of these charts. Sometimes you can get lucky with the break of the neckline but even then the only true test of a classic bubble is if after the break of the neckline to get a failed bull trap rally. PS. The one I'm watching most closely is AMZN

I've been playing this Amazon "every other retailer is a zero" story with long call options on a basket of retailers. The vast majority are setting up the same types of charts. Very profitable trade so far and I owe Julian thanks for giving me the initial idea to start digging into this trade.

Thanks Julian, David & CY, this dialog excellent. I have plenty of battle scars already from trying to short these names too early. I subscribed to Macro Insiders in the hope, with your help, can win in the end. Didn't participate sufficiently in the rally but most powder remains dry :). Excited to see the results of JBs algorithm, thanks very much guys.

Here's the latest list of names that have the makings of Classic Bubbles. As I said before you really only know once you get a failed bull trap rally. FYI DiB = Deep in Bubble. AMZN - Deep in Bubble NVDA – Unclean transition from Mania to parabolic, with some intermediate lower highs NFLX – broke Mania TL ATVI – Deep in Bubble NTES – Deep in Bubble IDXX - DiB ALGN - DiB CGNX – DiB TTWO – DIB good neck line at 80 MKTX – DiB, some fakeouts COHR – DiB, aggressively gappy ABMD - DiB OLED - DiB PEGA - DiB FIZZ - DiB HA – DiB, may be seeing preamble to bull trap, but parabolic move has been noisy TREE - EBIX – DiB, may be seeing preamble to bull trap, parabolic move is noisy and has plenty of gaps ATSG - RGEN – Dib, may be near top of bull trap PATK – More of shift in trend lines than a clear bubble, either mania hasn’t properly started or it’s all mania PLUS - DiB MGPI - DiB HSKA – DiB AXGN - And everyone’s favorite: XBT Curncy - DiB

Hi Julian, THANK YOU for this list of bubble tickers which you extracted from your scanning mechanisms. Just like to note that such content is exactly what would fit very well into what I noted above ( in a separate comment thread ) as a suggested improvement ( i.e. a section which allows you, Raoul or your Team to post more detail, charts or current thoughts worthy of sharing at various junctures ). Thanks

The only pro solution in my opinion is to do away with the comments section altogether and create the usual online forum where threads that receive a reply move to the top, creating a thread for every official update and allowing users to start their own, as done by sites like macrovoices and TIP

adding an advanced search feature and email alerts and all the goodies

Hi Julian, Thanks for your list of bubble tickers below which you extracted from your scanning mechanisms. Just like to note that such content is exactly what would fit very well into what I noted above as a suggested improvement ( i.e. a section which allows you, Raoul or your Team to post more detail, charts or current thoughts worthy of sharing at various junctures ). Thanks

Yes, there is lots of information for you to get accustomed too but you'll get into the rhythm and understand how best to apply it as we go...

Thanks Raoul, I like reading some of these questions and answers you and Julian put up here. I know it will be difficult to answer all, but please keep it up adds tremendous value

Great idea

Sure... I just like lowering the cost and the time decay a tad.