Notes From Underground: Be Vigilant, Very Vigilant

Today, I am writing this for all traders and investors. For many years I have been concerned that the market is sometimes plagued by headlines that create volatility as algos react to six words crossing the wire, only to be completely out of context when the article is published. But the damage is done. Most actors in the investment arena are unaware that MOST data releases and FED documents are provided to the media roughly 30 minutes early so that they can get their headlines and stories written for the scheduled time. My problem is that this antiquated methodology OUGHT to be extinguished because trades and information move in nano seconds rather than on Telex rollers as financial news was reported when this policy was enacted. When high frequency trading groups are spending millions of dollars to get edges in micro seconds it is certainly time to say goodbye to long-held operations.

Even more bothersome is the idea conjured in an Financial Times article on February 14 by Richard Waters titled, “Musk-Backed AI Group Delays Releasing Research Over ‘Fake News’ Fears.” Elon Musk finances an Artificial Intelligence Group, OPEN AI, that does in-depth research into the development of AI tools:

“The decision marks a rare public effort to withhold research as AI systems become increasingly powerful. Much AI research is ‘dual use,’ meaning it could be adapted for harmful purposes.

The Open AI research involves a language system that tries to generate relevant-sounding text from any prompt.When fed a sentence,it uses statistical methods to try to guess what next words are most likely to be,spinning out follow-on sentences that can sound disconcertingly coherent.”

Open AI warns that this technology can generate computer-driven financial news about real companies that has no baring on any genuine information. If Elon Musk is worried enough the malfeasance of such technology then it is time that regulators and the exchanges be vigilante into the possible misappropriation of data. I was going to warn that we need to be AFRAID, VERY AFRAID but that would accomplish nothing. We need to be VIGILANT and PATIENT IN OUR EXECUTION of well planned concepts and monitor our risks. The most difficult outcome for all investors is that Musk’s concerns make the use of STOPS a treacherous endeavor.

***Just a quick reference point. The FT had an article on Feb. 18 titled, “We need to talk about BUNDS.” The story highlights what has been a concern of mine at NOTES FROM UNDERGROUND for the last four years: A shortage of BUNDS because the ECB owns its capital key level of 18 percent coupled with the German government sustaining a budget surplus. The problem is made more difficult because the BUNDS and other German assets are considered HIGH QUALITY LIQUID ASSETS (HQLA). The author, Kate Allen, castigates the Germans for running excessive surpluses, which are in violation of the EU’s budget rules as is excessive deficits.

Of course Allen reaches the obvious conclusion of a pan-eurozone debt instrument, which would mean the mutualization of EUROPEAN DEBT. The chances of creation at this time are very slim as the esteemed German economist Otmar Issing warned a few years ago: TAXATION WITHOUT REPRESENTATION. This is what makes shorting BUNDS a difficult trade. Sell everything else on a long-term basis but trade the BUND cautiously as it stands to be the new widow maker.

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17 Responses to “Notes From Underground: Be Vigilant, Very Vigilant”

  1. Michael Aaron Temple Says:

    Yra
    One of the better investment rationales for owning a 2 yr bund (schatz) at negative interest rates is that it is a stealth play on the breakup of the Euro.

    Were the EUR to implode/fold, I have seen currency analyses that suggest that the newly configured DM might trade as high as 1.80 to the USD, providing “overnight” gains as the Euro-denominated bunds would become DM obligations.

    In the crazy hall of mirrors that we now call most markets, gold is increasingly going to be viewed as a “rock solid anchor” in a world of floating jetsam.

    Markets are “showing” us two BIG developments, in my view, that most mainstream investors seem blissfully ignorant of because “NOBODY” owns gold.

    1. Why are CBs buying gold so furiously? 680 tonnes in 2018, the most since 1968.

    2. Why are there suddenly big mega mergers in the gold mining sector? Easy answer is that it is much much cheaper to drill on Wall Street/Bay Street than in the real world, where greenfield projects require billions, and more importantly, take 6-8 years, assuming they are not in geopolitically undesirable locales.

    Global annual gold demand of roughly 4400 tonnes outstrips actual mined gold production of roughly 3300 tonnes by a whopping 1100 tonnes.

    As an old soybean trader (far older than I care to admit), I remember being told by some wise old souls (including one Keith Bronstein), that when marginal demand/supply crossover, price begins to move geometrically and not linearly. I would argue that the price suppression of gold by bullion banks/CBs is coming to a close, especially when you consider the enormity of the CB buying last year. It is not as though the investment trends of 2018 are not as bullishly propitious in 2019 as they were in 2018.

    Gold demand FAR outstrips actual supply. If/as/when gold demand grows stronger, the mining industry simply is incapable of amping up production similar to the folks at OPEC. Instead, the supply from “above ground stocks” is going to have to be called upon even further.

    So, what happens when the 680 tonnes of private demand that was substituted for by the CBs last year re-discovers gold and comes back to the party once gold begins to rally earnestly.

    Technically speaking, once gold hits $1400, there is not a lot of congestion until you hit the $1600s. Fun fact, during the plunge from $1900 in 2011 to the $1050ish low in 2015, gold has spent less than 100 days trading with a $1400 and $1500 handle (28ish days in the $1400s and 56ish days in the $1500s) as it fell like a hot knife through butter back in the 2013 waterfall decline.

    Ergo, not too many “trapped longs” who might be willing sellers once the gold rally gets rolling in the next few quarters.

    Negative yielding bunds, “crazy” talk of MMT, CBs buying gold “hand over fist”……I think somebody is “ringing that bell”

    • David Richards Says:

      Michael, indeed 1400 is a key level many are watching and could miss on the buy side as above that level, sudden demand & momentum could overwhelm and push price up too rapidly to buy. But from memory, I recall around 1520 being strong shelf support for gold, from where at least twice it bounced back up toward 1800. Thus former strong support might become strong resistance.

  2. mark meyer Says:

    the CME recently did away with the 30 min rule for all grain reports and now everyone gets the info at the same time-has led to less volatility at the report time.

    • yraharris Says:

      Mark—thanks for that input.We actually saw that with the release of the FOMC minutes last week when the media didn’t get the 30 minute lead time because the FED was closed due to bad weather—-it was a very quiet trade upon the release all at the same time–that is easy data to analyze

  3. ShockedToFindGambling Says:

    MAT……good post.

    It seems to me that the much bigger problem than the early release of economic statistics, is high speed data feeds that allow certain market participants to see prices/bids/offers before other participants.

    • yraharris Says:

      Shocked–that is a different issue but none the less the point has been an irritant to many but in my opinion makes this blog ever more relevant for quality discourse hopefully leads to better preparation which increases gains while cutting losses

  4. Don H Says:

    Yra,
    Machine readable text has been around for awhile. An earnings release with key words, such as “disappointing”, “misses”, “beats” etc. can trigger bids/offers. IF the subsequent fills are errant, they are just as easily reversed. It could be argued that news organizations place key words in the initial line purposely (no stats but…). Just another risk added to trading in uncertainty…

    • yraharris Says:

      Don H—I don’t disagree with your summation but my point was to note that if Musk is concerned by the nefarious nature then we need to be that much more vigilant in preparation,a point you similarly drive home.There will be opportunity in algo created chaos but not for the unprepared

  5. Rick Burgard Says:

    I always enjoy reading Yra’s thoughts..
    ________________________________

  6. Don H Says:

    The anticipated move on /GC underway:

    Don H on February 26, 2019 at 6:46 am
    Yra,
    Agree with /GC potential resistance overhead. Buyers wld need to regain & hold their bid above 1340 for a run at those levels. As it stands, anything less and the machines take /GC South from here… 2cents

  7. TraderB Says:

    Yra- I looked at the past 10 years and wasn’t able to determine any obvious correlation between 2/10 yield curve and gold price. What is the conventional wisdom on the relationship of those two things?

    If steepening is interpretted as higher wage, inflation, growth expectation… It could be perceived as a result of successful monetary policy. Higher rates and increased confidence in FED would be bearish gold.

    Flattening usually indicates Policy Error and loss of Fed Credibility. i.e. the recent Powell U-Turn. However you have been making the case that loss of faith in US Treasuries will lead to 2/10 steepening. A bullish theme for gold? 2+2=5

    • yraharris Says:

      Trader B—-the past ten years have been an extraordinary period for central bank activity ,certainly resulting in the signaling mechanism for sovereign debt markets.But I don’t agree that the curves didn’t help gold as when the Fed commenced QE the curves had initially steepened as the markets were anticipating increased inflation as the markets were flooded with money.The timing of the impact of flattening curves varies so it is near impossible to predict the exact impact points on a varietyof asset classes.But the initial steepening did impact gold prices.Gold made its highs in September ,2011 and the curve while not at it steepest was certainly not in any way flat.The SPS were gaining some footing and as the FED kept increasing the size of QE—needlessly, as the only game in town—bond shorts disappeared and as the all clear was given that the economy was saved from a 1937 meltdown investors begin turning to equities.In February 2013,I was doing a Watch Dog USA podcast when I suggested that GOLD was tired and that equities were proving to be a positive investment as dividends were the best return around—the e-mails blasting me as stupid filled my blog and other mediums.Your final point is one I concur with as the advent of steepeners would be a push that the market was becoming concerned about sovereign debt and the ability of central banks to control the monster they created.The FED is trying to discern the impact from how much reserves should the system employ.There i a massive bet made on the part of central banks and they HAVE NO REAL EXIT STRATEGY and NO I AM NOT A ACOLYTE OF MMT.And when I hear Summers and others talk about the ability to borrow at very low rates so they should ramp up borrowing I wonder if they stop to acknowledge that rates are so friggin low because of central bank continued action.Increased rates due to a true NORMALIZATION would be BEARISH GOLD BUT the FED just proved the point they do not have the stomach for it—Paul VOLCKERis not on the scene and when Ray Dalio interviewed him for 52 minutes he never asked Paul’s opinion about the current morass of central banking–it was only about Paul’s newest autobiography,Keeping At IT,which I had read and found the entire interview BORING.—But enough said –the curves did have an impact for a short time into QE to infinity.

      • ShockedToFindGambling Says:

        IMO, if Gold ever goes into a real bull market, The yield curve will steepen sharply.

        Not because high inflation is anticipated, but because people will be concerned about holding long term debt, even Sovereign, for fear of not be paid back, or being paid back in greatly devalued currency.

      • Trader B Says:

        One “tool” the FED has in their toolbox is to cap long-end rates (by threatening to buy treasuries if a certain level is breached). The scenario where the curve steepens in spite of their efforts would be the final chapter of this financial experiment gone wild. As Shocked eluded to… when this eventually happens, it will be the start of the real Bull Market in gold.

  8. Recoba Bacci Says:

    Trader B: By the time the event you describe actually happens, Gold will have been in a Bull market for 18 months. Markets anticipate reality

    • yraharris Says:

      Recoba—I don’t know about 18 months but when the fear of global central bank panic sets in the market will have already anticipated

  9. ShockedToFindGambling Says:

    Excerpt from Jim Grant

    “The Fed on a mark to market basis is what it was. As of September 30th insolvent. It is leveraged 100 to 1. That was showing 66 billion in unrealized losses mostly mortgage portfolio.”

    My understanding is that the Fed can only buy Treasuries and Agency Mortgages. Mortgages prepay monthly and always mature at a price of 100. Interest Rates are much lower than they were at the start of the Financial Crisis, so there should be large gains in many Treasuries and Mortgages.

    So, if the Fed is insolvent owning bonds that have no credit risk, and after a bull market, something is not right.

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