Notes From Underground: Welcome Back, Rick

On Tuesday, Rick Santelli and I dissected the European Parliamentary elections. The results weren’t far off the projections as the GREEN PARTY was able to siphon off voters from the established left-leaning parties as they attracted more young voters than in previous EU-wide elections. There will be much to discuss as we head into the “horse trading” of Brussels politics but I stick to my insistence that the ECB needs the leadership of Jens Weidmann.

(Click on the image to watch me and Rick discuss the European elections.)

The trade situation can turn on a tweet from U.S. and Chinese policy makers can make it much too difficult to trade. I advise my readers to follow the discussions on the previous blog post as Mike Temple and Dave Richards along with Chicken provide some wonderful analysis on previously discussed ideas. Enjoy my discussion with Rick and then we at NOTES FROM UNDERGROUND will get to work unpacking some of these events that stand to set the world aflame as the year continues. There is no room for complacency in your trading scenario. We will look to take advantage of the situations where the blind have been led by the woman/man with one eye.

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24 Responses to “Notes From Underground: Welcome Back, Rick”

  1. Arthur Says:

    Contributions to 2018 EU budget

    Germany 22%
    UK 16%
    France 15%
    Italy 11%
    Spain 8%
    Netherlands 5%
    Ireland 1.5%
    Finland 1.4%
    Greece 1.2%
    Malta 0.1%

    European Commission

    • yraharris Says:

      Arthur–good point but also be aware of the capital targets that the ECB adheres to based on GDP and the lack of German debt instruments because of the Bundestag being so fiscally austere—never a good idea to short German debt unless the Germans capitulate and allow an unified banking insurance scheme ,coupled with fiscal harmonization and thus the creation of a EUROBOND–otherwise being short the Bund even at a negative 17 basis points is not,I repeat ,IS NOT the best instrument to short

  2. asherz Says:

    Yra- The Mike Temple/ Dave Richards conversation was quite interesting over the last 10 days. But the big picture as I see it is that we haven’t had honest markets since 2008/9. Just interventions and that accounts for the levitating stock markets and precious metals losing their safe harbor status. The VIX management has been on center stage. All this courtesy of the Plunge Protection Team. The bond markets are one area where control cannot be applied except for the short term. Inversions are beyond the grasp of the interventionists.
    But with the what may be the beginning of losing control, an important development now. The resignation of the number one and two members of the PPT. And with a 3 day notice. Rats abandoning the ship? Read the announcement below.

    • David Richards Says:

      Be sure to read the comments therein… lol.

      Besides lacking “honest markets since 2009”, they’ve also lacked honest earnings since March 2009 when Congress held a gun to the head of FASB and forced it against its will to change a centuries old accounting rule of “mark to market” to “mark to whatever the hell you like” (but that doesn’t apply to individuals applying for a loan or mortgage, no-no).

      But on the other hand, fake earnings fit with policy-driven, fake markets. A global phenom. Keep stackin 🙂

      • Asherz Says:

        What is really a red flag is the three day notice for resignation. Generally leaving a position like this you wait for replacement or minimally thirty days.
        Maybe their replacements can keep the game going but Potter sees plunging yields as the dam cracking.

        Long gold short S&Ps with stops at logical points if this story is the big deal it may be.

    • yraharris Says:

      Asherz–yes I posted on the previous blog that Simon Potter has exited stage left pursued by a bear.Interesting that the CNBC crowd was fairly silent on this—is there an issue burning somewhere as the zerohedge article points out.I wonder if the two have jobs lined up at the trading desks of some high profile institutions.Let’s wait to see how this falls out but certainly an issue.Further,today the grand promoter Cramer was calling for a rate hike in an effort to calm the markets or so it seemed–it was so convoluted that he created his own counterfactual.Where this goes I don’t have a clue but it is tough dodging between tweets and algo crafted headlines.As you point out that curves are beyond the the grasp of the interventionists and we are also back to the 5/30 steepening while the 2/10 flattens–the speculators having their say somewhere in the duration game

  3. Rob Syp Says:

    Welcome back Yra… with the grains big time move the flooding are these 25 50 or 100 year floods? Beyond the weather how much is China in play in the price movement? You hear some farmers say the Tariffs have been the nail in the coffin but is it more than that? It’s hard to follow or keep up with how the growing season is in South America.

    Thank you and God Bless America.

  4. yraharris Says:

    Rob Syp—the issue of weather causing havoc for farmers already under duress is a severe problem and may well affect the 2020 election.But for farmers it will become troubling if prices rise dramatically as consumers are aware of coming lack of supply.The Chinese will be forced to buy contracts to assure supply to prevent being caught off—Latin American supplies are presently abundant but that can change in a hurry.The hedge shorts caught short in the recent rally will have a huge losing trade if the Chinese begin buying as a preventative move —image if a severe drought follows the recent deluge –will this be the year of the locusts?

  5. Michael Temple Says:

    Correct….Bond market is far too large to manipulate for any but the shortest of time frames. But, I think the ability to manipulate stocks which are highly valued just as recession may be nigh will be sorely tested.

    As I have said, I love RED EDs and am not as table-poundingly opinionated about stocks and PMs, as I readily concede that markets are, indeed, manipulated.

    I do believe, however, that gold will have its day again, but not until after a big break in stocks triggers QE4 and ZIRP

  6. Rob Syp Says:

    Michael, When you write RED ED’s I at least know it’s Eurodollars but what month and year? Thank you

  7. Michael Temple Says:

    June 2019 futures, being the 1st “June” contract, would be viewed as “green”.

    Any subsequent “June” futures, such as June 2020 or June 2021 etc, would be called “Red” to designate that it is the 2nd/3rd etc such “June” contract.

    Same would apply to Sept/Dec contracts, as well as any other monthly listings.

    Presently, the REDS begin with the June 2020 contract as there is still the June 2019 contract on the board, though that will soon go “off the board”

  8. Michael Temple Says:

    Perhaps you are right. But RED is where the action is.
    Trump is determined to out-Smoot Smoot-Harley

    This Mexican tariff treat is mind numbing and points out the YUGE risks in stocks with an economic madman loose in the WH.

    5 yr yielding 1.98% while 3M/10 yr is inverted by 17.

    EDM20 up 6 tics!!! And if Mueller’s press conference now triggers impeachment (right or wrong, with deference to Phoo), I don’t think we should underestimate the unintended 2nd and 3rd order consequences.

    I think we are speeding towards not just a speed bump, but towards a WALL. Fed is already nearly 75 bp behind the curve. I think we could see 100 bp of cuts easily by year end if this Mexican tariff threat goes through. Would almost certainly push us into recession


    • TraderB Says:

      The implied interest rate on the REDS is now 1.5%. The WHITES are 60-75 basis points higher. The 5 Year is 50 basis points higher. The yield curve looks ridiculous!

      Everything you are saying makes a lot of sense, but how could the REDS still be the optimal thing to be long? Wouldn’t it make more sense to buy some combination of WHITES and GOLDS (1year and 4 or 5 year futures)?

      If you are certain we are about to see QE4, QE5, and so on… Then buying duration here (5yr or 10yr) would be the better move wouldn’t it?

  9. Michael Temple Says:

    Trader B
    My money is on the REDs. In fact, the much longer dated ones may not be worth it as Fed May stop at the zero bound which means deferred EDs may not climb beyond 99.50ish regardless of duration.

    The more interesting play, one which Yra has highlighted, is when to buy gold as ZIRP/QE ultimately kick in, not to mention a possibly troubled USD as deficits explode in the next recession.


  10. Chicken Says:

    10yr approaching 2% much faster than I anticipated…. Wondering if there’ll be overshoot.

  11. Michael Aaron Temple Says:

    Before all is said and done, I expect UST 2 yr to drop below 1%, and the 5 yr may not be too far behind…..10 yr clearly heading to a 1% handle, as well. But, I am not sure if it challenges the previous low yield as yield curve widening is a very real probability once Fed embraces ZIRP and QE, especially if Fed decides to do QE-lite by pegging the 2 yr yield as previously floated by Lael Braenard (sp?)

    What a dramatic move today in RED EDs. EDM20 up a staggering 16 tics, just 9 tics shy of a full 1/4 pt rate cut.

    And, a very astute bond maven has highlighted that the rather esoteric 5-yr forward of the 5-yr (in other words, the 5-yr UST that will be issued in 2024) has inverted to the Fed Funds rate, a very ominous development. Last time such an inversion occurred was 2007. From there, overnight rates basically plummeted to zero within the next 24 months.

    Frankly, I think it is far more likely today that we see Fed Funds plummet towards ZERO far faster given the lower starting point and the likely beginnings of recession, if we are not already in one.

  12. Michael Temple Says:

    In the span of less than 24 hours, I cannot believe these 4 bombshell stories that have hit the wires.





    In story #1, Sec Def Shanahan accuses China of using a “toolkit of coercion” to help “erode the values and principles of rules-based order”.

    Will Xi respond kindly to this? Of course, not. In fact, couldn’t those Pentagon views aptly describe Trump’s course of action lately?

    Story #2. Nobody reads or even knows about the Fedex screwup with Huawei packages here in the US. But, in China, it is on the National Evening News and China is sharpening her knives to punish Fedex and other US violators.

    Story #3. India, a geopolitical ally of US and long-term foe of our new arch-enemy China, has just received a trade war declaration as Trump is raising tariffs on India, choosing late Friday night to announce it. Nice way to congratulate Modi on his election victory.

    I thought the enemy of my enemy was my friend. India is China’s friendly foe. And this is how Trump chooses to treat India.

    Story #4….Trump now channeling his inner Pocahontas. Perhaps it is high time to legally attack/cut down to size the FAANGs. Politically and morally, it might be the right thing to do. But, it is decidedly NEGATIVE for the stock market as FAANG fever has helped lift the averages back towards their recent all-time highs.

    Facebook is soon to fall under the microscope, as well…And with the spectacular flops of Uber and Lyft leaving a sour taste in investors’ mouths, how is this not a BELL RINGING exercise in marking a potential top in PEAK FAANG valuation?

    Do I think stocks collapse on Sunday night on all of this.

    No, not really. But, in the same breath, I actually think these 4 horribly negative stories, all of which come from “out of the blue” only add to the angst and agita that was kicked off by Trump’s Thursday night winner when he unleashed Tariffs on Mexico to help drive SP down 39 points on Friday.

    What do I expect? I think the 10-yr yield has an imminent date with a “1%” handle yield in very short order.

    2s and 5s might plummet even further from here.

    And, in one final ominous development, a very wise bond market analyst has highlighted that the very esoteric rate of the 5-year forward of the 5-year bond has inverted to the Fed Funds rate.

    Only very sophisticated institutional bond investors dabble in this derivative, so this is not “Joe Sixpack/Retail”.

    Last time this rate inverted to Fed Funds was………2007. Less than 2ish years later, Fed Funds collapsed dramatically towards zero and USTs were the “kick ass” asset of that 24 month period.

    CODE RED, if you ask me….Or, perfect time for RED EDs!!!


  13. TraderB Says:

    Mortgage REITs like TWO and NLY were like ATM machines during the QE years. With the inverted yield curve, these stocks have gotten smoked. Are these a buy here? Shouldn’t these do awesome if/when the curve steepens?

    Platinum is now back to $500 below Gold. That happened very quickly.

  14. Michael Aaron Temple Says:

    Trader B
    Yes, mortgage REITS should begin to improve if/when the yield curve widens out….But if rates should continue to plummet, the negative convexity of their portfolios could still present some problems.

    Similarly, you could consider buying certain closed end funds that invest in munis/high grade corporates and which lever their funds (not too dramatically) with the issuance of short-term debt vehicles that should benefit from any significant drop in funding rates as Fed begins its easing cycle, something which I think is a certainty.



    • yraharris Says:

      Michael–high quality response and I believe the negative convexity is spot on–interesting that there was discussion about a FSOC meeting on Thursday night

    • TraderB Says:

      FFM19-FFM20 is now -75 ticks. I don’t dispute that a 50 basis point cut could come sooner than 2020. The futures are implying that is now the case. The REDs are implying that there is another 25-50 basis points of cuts in store for 2020. So being long the Reds here is betting that not only are we getting a cut of 75-100, but there are even WAY more cuts to follow that the market hasn’t yet priced in. That seems awfully aggressive.

      What makes you so confident that we are going back to ZIRP? What if this Trade pressure actually succeeds in getting China to make some concessions and this trade dispute de-escalates itself? Would you still want to be long RED EDs in that scenario?

  15. Chicken Says:

    I ask myself, What would Kenny Rogers do?

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