Notes From Underground: Putting Things In Perspective

Just a few quick points that are relevant to the markets at the end of the year:

1. Tonight I am including charts of the U.S/German two-year yield differentials. The U.S. two-year note is yielding 256 basis points above the German rate. This is relevant because both instruments are high quality assets that play an important role as collateral in the funding markets. I’ve also included a 25-year chart of the U.S. 2/10 yield curve. Note that the last two INVERSIONS occurred before significant equity market corrections. Does this current flattening portend a stock market correction? We can’t be certain because the role of the central banks has certainly created an investment environment where markets suffer from a lack of RISK PREMIA in all asset prices.


Many asset managers fail to believe the FED will raise rates three times in 2018 but if the central bank is more hawkish in response to real or imagined inflation the yield curve may invert. Does a flattening yield curve put the FED on hold as it waits to see the effects of less ECB/BOJ QE on U.S. bond prices? If it is foreign bank QE programs that have pushed U.S. long-term yields lower, then the FED may want to be patient just t be certain.

2. BOJ Governor Kuroda gave a speech in Zurich, Switzerland in mid-November in which he introduced the term”reversal rate,” an indication that the BOJ may end QQE earlier than many market participants anticipate. Kuroda has since walked back that statement but the idea is in the market and some are predicting that the BOJ will shorten the duration of its current purchases. Regardless, with the market short the YEN watch for any rallies. The markets are thin and subject to volatility. An interesting corollary to the YEN is the Swiss/yen cross. These are both considered CARRY CURRENCIES because investors borrow these currencies because of their negative short-term rates, which allows cheap funding for other investments. The SWISS/YEN is currently trading at 1.1409, the exact low made the week of January 12, 2015 when the Swiss National Bank removed the floor to the euro/Swiss cross and the Swiss franc exploded to the upside. Also, the CHF/YEN 200-day moving average is 1.1400 on CQG. If there is any veracity to Kuroda’s comments on the “reversal rate” the YEN should certainly rally against many of the major currencies.

3. Wednesday morning at 9:00 a.m. CDT the Bank of Canada announces its interest rate decision. CONSENSUS is for the rate to be kept unchanged at 1.0%. I WILL NOT BE SURPRISED IF THE BOC RAISES RATES BY 25 BASIS POINTS because of the recent  strong jobs data and a robust real estate market. The Bank of Canada never embarked upon a QE program so it does not have the latitude of shrinking its balance sheet instead of raising rates. The BOC statement will be important regardless of whether or not there is a rate rise for it will set forth any concerns the BOC has about an overheating economy. The Canadian dollar is up 6% on the year versus the U.S. dollar so it has room to appreciate further without raising concerns about an overly strong currency. Plus a stronger CANADIAN DOLLAR may placate the Trump White House while it debates NAFTA.

***In an article about Paul Tudor Jones, it was revealed announced that TUDOR is closing the DISCRETIONARY MACROFUND and rolling its assets to the BVI FUND and it will be managed by Paul Tudor Jones himself. The global-macro trade has been a difficult terrain for the last few years and Tudor’s funds have significantly underperformed equity-based funds. It may be indicative that one of the great fund managers senses a change coming in the global investment world. The article quotes Jones’s mentor Eli Tullis, a legendary cotton trader: “Son if the market borrows from you, don’t get mad. Just make sure it pays you back with 100% interest.”

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5 Responses to “Notes From Underground: Putting Things In Perspective”

  1. Angelo Gallo Says:

    Yra: Am wondering your thoughts on this article by Chris Whalen:

    Take care.

    • yra harris Says:

      Angelo–this is an exemplary piece of Whalen thinking—brilliant in its analysis and will certainly be put to the test probably by September,just in time for mid-term elections.Jap Powell is certainly more pragmatic and may put the SOMA on alert to maybe hedge some of the MBS for the sake of testing such a perspective.Marvin Goodfriend becomes even more important because of some of his views on IOER—-thanks for posting this article.

  2. yra harris Says:

    Angelo–will read it and let you know.I respect Mr.Whalen’s work–one of the best bank analysts there is.

  3. BGC Says:

    Yra, 2017 word of the year?

  4. Chicken Says:

    Wow Yra, thanks again for the provoking thoughts.

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