Notes From Underground: Relevant Issues for Today’s Global Macro Environment

As the latest drama of the U.S./China trade negotiations unfolds, there are several that continue to boil. The president is tweeting less about stock market valuations and more about the revenue impact from the fresh tariffs On Sunday, Fox News’ Chris Wallace disrobed Larry Kudlow. The economic adviser epitomized the age-old adage: “An honest person sent abroad to lie for their country.” Yes, Mr. President. A tariff is a tax on your populace. If tariffs are great for the U.S. economy, then raise them 1000% and balance the budget without inflicting any harm on Americans’ pocket books. [Yes, that’s sarcasm.]

I’m wondering if President Trump is letting Wall Street endure some hurt in order to assuage the tremendous pain being inflicted upon Main Street America as China utilizes Latin American grain to supplant U.S. production. The United States has made China’s consumers a key element for agricultural policy for 35 years. Soyabean producers are afraid that all of the effort is being eroded by the current strategy of correcting past industrial wrongs of job losses and intellectual property theft. Trump would actually gain credibility with his base by allowing Wall Street to suffer losses along with the farmers. So it’s Lighthizer versus Mnuchin/Kudlow.

An issue of great concern continues to be the massive amount of SHORT VOLATILITY POSITIONS across myriad asset classes. It is not only the VIX that has been the target of short sellers in an effort to enhance returns by collecting premiums in full knowledge that the FED will prevent any deep disruption to the financial system.

The January Fed pivot revitalized these investors, which crushed volatility premiums in GOLD, SILVER, CURRENCIES and BONDS. On Monday, GOLD volatility rose long before the metal rallied, jumping to roughly 9.5% from 7.6%.

As I theorized a few weeks ago, the short vol positions are so massive that the FED is concerned about the systemic risk arising from a sustained spike in volatility. I wonder if Secretary Mnuchin is burning up the phone lines to large banks like he did in December.

Then there is the potential that Trump will invoke tariffs on European auto imports this Friday. There is no question that the president is miffed at German Chancellor Merkel and French President Macron over his treatment at last June’s G-7 meeting in Canada. Will Trump allow his ego to preside over qualitative trade relations? This is a MAJOR ISSUE as Europe on Monday drew up its own list of trade areas for possible retaliation. And then there’s the impending European-wide elections in which the nationalist-oriented parties are expected to poll well.

However, the world is fixated on China. Will this be another catalyst that plagues the VOL SHORTS? Germany, Europe’s economic engine, is vulnerable to increased auto tariffs, especially as German industry has suffered from a slowdown in the Chinese economy. Yet nobody seems concerned. WHY?

Secretary of State Mike Pompeo is heading to Russia to meet with President Putin on what seems to be short notice. What is prompting Pompeo’s impromptu visit to the primary troublemaker in the Middle East? The U.S. has recently deployed an Aircraft Carrier task force to the region with a squadron of B-52s. There have been renewed sanctions against Iran with an increase in bombastic rhetoric.

The Russians hold the key to the regions stability. Russia’s status has been elevated since it supported Syrian President Assad in his victorious Civil War. As a result, Putin has forced other regional powers — Turkey, Saudi Arabia and Israel — to travel to Moscow to pay homage to Russian strength in the region. Is Pompeo looking to get the Russians to acquiesce to a potential U.S. military strike against Iranian interests in Syria and elsewhere? We should also be asking if the cost would be an easing of U.S./Russian sanctions? If so, Russian assets would become desirable.

More importantly, over weekend there was news on two attacks on Saudi Arabian commercial vessels in the Persian Gulf. News reports claimed these attacks to be acts of “SABOTAGE.” It is unclear what sabotage actually means but it makes me wonder if this is a Saudi GULF OF TONKIN moment.

The bigger question in deference to these questions is the largest concern of all: Is it really a good time to be promoting a massive short volatility position? I’m waiting on Jerome Powell to acknowledge the TRANSITORY nature of systemic financial risk. Are balanced short vol positions a problem in an imbalanced world where 2+2=5?

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15 Responses to “Notes From Underground: Relevant Issues for Today’s Global Macro Environment”

  1. Owens Tom Says:

    Anyone wonder if anyone gets in front of the Tweets?

    • yraharris Says:

      Mr.Owens–I ask that question each and every day—-and now the Chinese have caught on so we are getting it from Both Sides Now as clouds get in my way–or rather the cloud driven algos get into my pocket

  2. Publius Says:

    Yra, I wish to post anonymously as Publius on your comment section.

    • yraharris Says:

      No problem Publius—as long as you stick to the basis of our social contracts—you can post as Leviathan or Rousseau or Locke as long as the social contract is adhered to—no politics unless it provides outcome based results for potential profits

  3. Gregg Slutsky Says:

    Nazi s marched in Arkansas over the weekend screaming ” 6 million more”. No one seems to care either. Apathy starting to become contagious I guess

    • yraharris Says:

      Greg—it is all about the headline readers and beyond that no one cares in the world of finance–very unfortunate but the halls of Congress appear to be alive with the sound of ugly echoes from time past and the silence is deafening

  4. Trader 1 Says:


    USMCA Trade Agreement – Why hasn’t it been put up for a vote in Congress yet and signed into law?

    What’s the point of all these tariffs and tweets if in the end nothing gets signed into law??

  5. Donna Says:

    The idea of Chris Wallace disrobing anyone on his show is cringe worthy 🙂

    • yraharris Says:

      Donna–even worse with the thought of Kudlow.But Wallace is a quality journalist trained in a different era

  6. Michael Aaron Temple Says:

    An excellent overview of the state of markets and geopolitical developments. If you remember way way back in 1987, the world was similarly disjointed amidst the backdrop of a fearless stock market due since “portfolio insurance” was so easy to utilize to hedge one’s equity exposure.

    Your summation is what has so animated me to be long RED EDs as a cheaper way of buying “S&P puts” which have been so expensive for so long.

    Trump LOVES playing El Grand Jefe in international matters because he isn’t constrained by Congress, as he can exercise his Presidential Powers and Prerogatives. So, you are most correct to worry about potential kinetic outbursts against Iran and continued
    TRADE WARS with the EU, now that Trump has jabbed at Xi.

    As the world turns and unfolds, Powell will, indeed, likely have to “clean up” for Trump by keeping watch over likely rate cuts to counteract the “accidents” that are happening and that may metastasize into big headwinds for the US economy.

    Your point about Trump’s desire to inflict a little “hurt” on stock investors was buttressed very darkly by Jim Cramer this morning. Cramer said that he spoke with some Trump confidantes/aides over the weekend and that Trump knows exactly what he is doing with regard to Xi/China. Trump feels like he is playing with “house money” with stocks near to all-time highs and can afford some stock market hiccups. In fact, Trump apparently expressed a desire to see the ABC stocks (A for Apple B for Boeing C for Caterpillar) take a shot as their China exposure will hurt them during this tiff/war. Besides, Silicon Valley ain’t Trump’s “peeps”.

    Instead, Trump cares more about good old US of A companies like Verizon. So, apparently Trump (according to Cramer) actually WELCOMES a little wake up call for ABC-type stocks who do too much business with the “enemy” (China). In fact, Trump made comments in his Oval Office meeting with Orban where he repeatedly said that he hopes US businesses abandon their Chinese factories and bring the jobs back home, or take them to other countries.

    If Powell is truly aware of and concerned by massive short VOL positions, that is even more reason to expect him to have to ease MIGHTILY when another VOL-maggedon explodes.

    Again, bravo on a very chilling overview of just how out of balance financial and geopolitical markets are at this time.

    Final observation. I still haven’t heard one financial MSM commentator bring up the ghosts of Messrs. Smoot and Hawley.
    I find that rather amazing. Would algos even know how to process those two “words”?

    Rate Cuts by 4th of July, say I. I want to get bullish on gold, too. But, for now, the easiest call out there is for Powell to fold as stock markets come under increasing pressure emanating from the Tariff-in Chief at 1600 Pennsylvania Avenue.

    President McKinley campaigned incessantly back in 1900, proclaiming he was a “Tariffs Man”. Waiting for Trump to appropriate that moniker, too.

    Good night.

    • yraharris Says:

      Michael–great summary of yesterday.I suggest you read Professor Irwins book ,Clashing Over Commerce .As I write Salvini is upping the ante for EU budgetary politics—again with Bannon in Europe consulting with the nationalist oriented politicos I am wondering what Trump will do as far as tariffs on autos.There is no doubt in my mind that the Fed is concerned about the redo of underwritten portfolio insurance—what will be the break point–I know we are not close but there has to be some margin calls being sent out

    • yraharris Says:

      Michael Aaron Temple—-an Ambrose Evans Pritchard piece tonight puts your timeline into play in a big way–the HK DOLLAR PEG could be the achilles heel for an “intransigent” Powell

  7. Michael Aaron Temple Says:

    Thanks for the heads up on Ambrose Evans…Will try to get to it later today.
    Meanwhile, the RED EDs are exploding up another 7ish tics this morning as the front end yield curve powers higher again with UST 2 yr now at 2.15%
    2/5 Inverted by 1 bp
    3Mo/10Yr Inverted by 2 bp

    UST 5-yr at 2.14% is 21 BPS inverted to the new “technically” adjusted IOER rate of 2.35% 21 BPS!!!!!!

    An old rule of thumb used to be that 2 yrs yielded 50ish bp more than overnight Fed rates. You might even tell me that it used to be more like 75 bp, but I am trying to be conservative here.

    So, UST 2.15% for 2 yr would imply an expected 1.65% Fed rate under “normal” circumstances.

    Yet, Fed is still holding steady at 2.25-2.50%.

    Old rule of thumb, if it is correct, means Fed Rate should be 1.65% or 60-85 bp lower than TODAY.

    Trump is LYING with every single Tweet that all is well with the China trade talks…..Did you know that one of the CCTV evening broadcasts two nights ago had over 3.3 Billion Views. The anchor was spewing martial-like invective at the US, proudly and defiantly proclaiming that the Chinese have a 5000 year history of not backing down in the face of much worse attacks/crises than this.

    Trump is so out of his element. And, the Treasury curve is not buying one whit of what Trump is trying to sell.

    As for HK peg, if that did give way, it would be a Nuclear Bomb of Black Swan proportions….Not sure how much weight I attach to the probability of it breaking, but any game theory would suggest the risk is not non-negligible. Whereas the consequences would be earth shattering.

    Adding to the overall angst and agita, early morning news that US is ordering all non-essential US govt employees/families out of Iraq and State Dept has issued a “NO TRAVEL” warning to all Americans to stay out of Iraq.

    Yeah, sure, how much of that WeWork IPO can I get?

    US yield curve is FLATTENING again. Powell cannot be happy with this….I repeat myself. Stocks will not have to fall to Dec lows to trigger a rate cut.

    A 7-10% fall from the recent 2950ish SP level might just do the trick, especially if it arrives in several chunky down days of 600/700/800 pts or more on the Dow.

    Trader B—-The White EDs will do fine. RED EDs are the higher beta play.

  8. Michael Aaron Temple Says:

    Somebody should ask Trump the following

    If raising tariffs on Chinese goods is such a good thing for the US (collecting record tariffs, says he), why is Trump foregoing raising
    auto tariffs on EU/German automakers at this time, and delaying it
    for 6 months.

    Can it be that Trump is sick and tired of so much winning?

    I truly understand how/why the algos jumped back into stocks as this 6 month delay was announced. Yet, the key market to watch is, of course, USTs. UST 2 yr still hanging tough at 2.16ish and RED EDs
    still up 5ish on the day after spiking as high as up 9ish.

    Bloomberg has a piece out this morning highlighting that bond market inflationary expectations have dropped so low that Fed may now be forced to SLASH, not just cut rates.

    Bond market is the Sheriff in Charge….Not Stocks and Certainly not Trump.

    Still don’t know how to handicap the HK$ peg story. But, it would be EPICALLY bad if it came to pass.

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