October 21, 2021
One more time…to clarify…Eurodollars have nothing to do with Europe or the Eurocurrency…They reflect nothing more than where LIBOR (the international benchmark for short term interest rates) is…and EURODOLLAR FUTURES GO DOWN WHEN SHORT TERM INTEREST RATES ARE GOING UP.
Eurodollars are going DOWN
Closing lower again today
At new 18 month lows
As I have repeatedly stated, just because you are a Federal Reserve Board Governor, or even its Chairman, does NOT mean that you know what the economic future will be. Those guys are all guessing just like everybody else, and not to beat a dead horse, but as a prominent example, I will remind you that NONE of them saw the Mortgage Crisis coming, nor did they anticipate the Great Recession…and in fact, they weren’t even aware the crash was underway until well AFTER it had already begun. And this is not suggest that they are a bunch of dummies…but simply to point that they, like everybody else, DON’T KNOW how the future will unfold…and that quite specifically, when it comes to interest rates, the GIGANTIC Eurodollar FUTURES market has forever had a tendency to move interest rates, whether higher or lower…LONG before the Fed officially does so…and that, I believe, is precisely what is happening right now…
Interest rates are ALREADY rising via the futures markets…having added about 1/4% during the past few weeks…and are, I believe, just getting started on the upside. After all, the purpose of rising interest rates IS to either slow the economy or slow the rate of inflation, and realistically speaking, raising short term rates to a 1/2, or 3/4, or even a full 1%, will NOT slow down ANYTHING…so yes, I am assuming that the 1/4% increase we’ve seen in future IS just the beginning.
And just for the record…as to whether the Fed does or doesn’t know what’s coming? Here’s what Fed Chairman Powell had to say this past summer…
Chairman Powell Jun 16, 2021
The last thing I’ll say is this is an extraordinarily unusual time. And we really don’t have a template or any experience of a situation like this. And so, I think we have to be humble about our ability to understand the data. It’s not a time to try to reach hard conclusions about the labor market, about inflation, about the path of policy. We need to see more data. We need to be a little bit patient. And I do think though that we’ll be seeing some things coming up in coming months that will inform our thinking.
Inflation, and whether or not it is merely “transitory,” has been a major subject this year since the Fed first used the term back in April…and more and more, this does not appear to be the case…which, I believe, absolutely calls for higher interest rates.
Here’s what inflation looks like at the consumer level…
And this is at the raw material level…which inevitably gets passed along to the consumer…
And the idea of an economy not growing fast enough? Or maybe going to slow due to Covid…or whatever? And still needing abnormally low interest rates?
PREDICTING THE FUTURE?
As a futures trader…trying to envision where markets will be 6, 9, or 12 months from now…part of any analysis does involve using your imagination…I mean, everybody knows what the past is, and generally speaking, where we are in the present…but to some extent, neither of those has anything to do with the future. So when I sit here today and “imagine” the world a year from now, I get something like the following:
A year ago, there were no vaccines, much less boosters, not to mention the next development of even pills we can take both to help prevent, and cure, Covid. Now look at where we are…Sold out stadiums versus nothing but virtual fans a year ago (and as aside, can you imagine where we’d be today if they hadn’t come up with the vaccines?)...At any rate, I believe that science will be making even further advances on the Covid front, and that a year from now, it is quite possible that Covid as an economic deterrent will be totally in the rear view mirror…Not eradicated but no longer the Black Swan that cratered the planet in 2020…And if concurrent with that, you then throw in the Infrastructure package, that sooner or later WILL be throwing some Trillions of Dollars (4, or 3, or 2…it doesn’t matter) into the system…I can only conclude that the economy is ONLY going to be strengthening CONSIDERABLY over the next 9-12 months…And beyond that, when you consider that all of Infrastructure project building will represent MASSIVE borrowing by the people who actually will be contracting the jobs…AND when you then throw all that together with the price surges we’re already seeing across the board in the markets? I CAN ONLY “IMAGINE’ THAT RATES WILL BE GOING HIGHER DURING THE COURSE OF THE NEXT YEAR…AND I SUSPECT, A LOT HIGHER THAN ANYBODY, INCLUDING THE FED, IS CURRENTLY ENVISIONING.
As for Eurodollars, which reflect short term interest rates IN THE FUTURE, the move towards higher rates (specifically LIBOR) has already begun…IN EARNEST really, having already raised rates by a full 1/4% out in September during just the past few weeks… And yes, that IS in spite of the Fed having yet to doing anything…which IS the point I keep pounding away at: THE MARKETS LEAD THE FED…NOT THE OTHER WAY AROUND…THE EURODOLLAR MARKET TAKES RATES HIGHER…AND THEN THE FED CONFIRMS IT…
Here’s a close up of the recent downside action and the implied increase in rates (so far)…
And here is LIBOR, which is what Eurodollar Futures reflect…
I have two options I am recommending at current levels with varying degrees of time and leverage…You can do either one…or do both in a combination.
SEPTEMBER 2022 EURODOLLARS
JUNE 2022 – 3 MONTHS LESS TIME BUT MORE LEVERAGE
I sure wish that you guys who are still on the sidelines would do something with this…For one thing, I don’t think you will EVER get the opportunity to bet on rates going up from almost zero again…And one more time, this trade has enormous leverage and a TON of time to have it happen..
If you agree with me…I urge you to STOP JUST WATCHING. Let’s get you on this…
All option prices in this newsletter include all fees and commissions. All charts, unless otherwise noted, are by Aspen Graphics and CRB.
The author of this piece currently trades for his own account and has a financial interest in the following derivative products mentioned within: Eurodollars