January 10, 2020
An overview for the coming year…
The Economic Pendulum is swinging to positive…
As I pointed out on various occasions last year, for months on end the financial media was jampacked with predictions of “Recession coming!”, accompanied by seemingly innumerable Wall Street advisories that investors should therefore “be cautious and/or defensive” regarding stocks and the economy…Quite to the contrary, however, my own view, maintained throughout 2019, was:
(Feb 8, 2019) “I honestly see 28,000-29,000 (Dow Jones) as a definite possibility by year’s end.”
(July 18, 2019) “I believe that all the ‘Global Slowdown’ talk is Nonsense. I firmly believe that Stocks and the World Economy are headed decidedly higher…”
(Nov 11, 2019) “I continue to maintain that the USA and World Economies are on the upswing, that the ill effects of the Trade War have been long since been fully accounted for in the markets…and that by the time we get to next Spring (2020), both globally and here in the United States the economic news will have become overwhelming positive.”
And today? I still believe the same to be true…with the one big difference being that, with stocks making new all-time highs and the economy steadily chugging forward, it now appears that the majority of those formerly bearish economists and analysts have now begun to discard the idea of a recession and/or a serious setback in the stock market, the result being that the media driven, mob psychology “opinion-pendulum” has now shifted towards a decidedly more positive tone…and I believe, will be tilting even more so in the months ahead as the USA and World economies shift into even higher gears. The truth is, my guess is that by mid-2020, you will have started seeing media references to “the SURPRSINGLY STRONG economy” or even “BOOMING world growth.” And if this is the case…I firmly believe that we will also see what virtually no one in the financial community is expecting…THIS YEAR…which is HIGHER INTEREST RATES.
The negative effects of the trade war are (must be?) waning…
And with shackles off, I think the next thing is
“Up, Up and Away!”
I believe that Trump’s trade war, with all of its tariffs, and more importantly all of the uncertainty it has caused in board rooms around the globe, has definitely put any number of normal “let’s expand our business” plans totally on the back burner by CEO’s for the past few years…BUT…Now that the black trade cloud seems to be lifting (just in time for the election?), and with all the aforementioned bearish economic geniuses now more optimistic about the future, I can easily imagine that we are about to see the unleashing of a LOT of pent up EXPANSION…EVERYWHERE…and with it, a potentially enormous increase in worldwide loan demand. After all, construction and expansion ARE done with borrowed money…and just putting it in the simplest terms: Increasing demand for borrowed money DOES generally result in a higher price for that money…or higher interest rates. Believe me, same as in any business, if you are a lender, and people are beating down your door to borrow from you, the price of your product (money) does tend to go up (interest rates)…And that IS what I think we are going to be seeing a lot of in 2020, and beyond.
This is my opinion. I may be dead, dead wrong…which could mean losing every dollar you invest, but concurrent with a strengthening Global economy, AND some greater degree of inflation than the markets are anticipating, I continue to expect a move towards higher interest rates throughout the entirety of 2019…and beyond…which in the futures markets would mean declining Eurodollar prices…With this in mind:
I therefore continue to recommend, using the September 2020 contract, shorting futures and/or buying puts.
Here is the set up…and bit of reminder as to how Eurodollars work.
For one…The Eurodollar contract (which has NOTHING to do with the Eurocurrency…or Europe itself even) specifically correlates to the London Interbank Offered Rate, commonly known as LIBOR, with LIBOR being globally recognized as THE benchmark for short term loans in Dollars…In other words LIBOR serves as a base rate for lending, meaning that the interest rate for loans (in the USA and around the world) are often quoted, for example, as something like, “LIBOR + 2%.” I would add that with the majority of international trade being financed via LIBOR and the Eurodollar market, it is then understandable that Eurodollar futures are by far the most heavily traded futures contract there is…anywhere on the planet…Just to give you a better idea of how big this market actually is, there are currently over 50 million options being held in Eurodollars, the point again being, this is a monster contract…actually having more participation than all of the world’s other futures contracts combined.
Here is the crux of my thinking…
Just like all of the futures markets, the further out you go in time, the more likely you are to find contract prices that eventually prove to be out of sync with reality…that quite often you find markets reflecting perceptions that have been generated, and speculated on, by what WAS the prevailing mentality…by what WAS the media inspired “groupthink”, which is precisely what I think is now blatantly the case in Eurodollars…To be specific, remember all that “recession coming” talk that was still everywhere just a few months ago? And the accompanying fear that, “Oh my God. With the recession coming, the Fed needs to ease even more!”? Well guess what? That idea got built into Eurodollar futures, to the end that the September 2020 Eurodollar futures contract STILL has EXPECTATIONS for more than a 1/4% cut in rates built into it…which, in my opinion, is just nuts…and as I have seen 100’s of times (or 1000’s really), I fully expect that by the time the September contract expires 248 days from now, Eurodollar prices will be nowhere even close to where todays PERCEPTIONS currently have them.
The next few charts should help you see what I mean…And a reminder: Eurodollar Futures go UP when rates are declining…and go DOWN when rates are increasing.
First up…Here is a classic/normal example (from the last year) of how future perceptions can routinely be dramatically different from what becomes the reality.
Here is what the market looks like today…reflecting the perception that interest rates will drop by 1/4% during the next 9 months…
Here is the option I am currently recommending…and three possible outcomes depending on what DOES happen in interest rates…
This is my opinion…and I might be dead, dead wrong, but I THINK THAT, BY SEPTEMBER (OR EARLIER REALLY), THE ECONOMIC CLIMATE IN THIS COUNTRY, AND AROUND THE GLOBE, WILL BE VIEWED AS QUITE, QUITE STRONG…AND ALONG WITH THAT BELIEF, MY GUESS IS THAT THE IDEA OF “FED EASING” WILL HAVE BEEN TOTALLY REPLACED BY, “WHEN WILL THEY TIGHTEN?”, AND AS A RESULT, THE SEPTEMBER EURODOLLAR CONTRACT, CURRENTLY STILL REFLECTING A QUARTER PERCENT EASING…WILL BE SUBSTANTIALLY LOWER THAN IT IS TODAY.
And just one more possibly relevant observation…The Global Slowdown? The following countries now have their stock markets trading at or near new All Time or 10/20 Year Highs: United States, Great Britain, Germany, France, Switzerland, Russia, Japan, India, China (Hang Seng), Australia and Canada…And there are more…but that’s enough, I think, to indicate that “slowdown” is not what’s coming next for the Global Economy.
I would be very interested in hearing what you think. Give me a call if you want to talk about it…or just to say hello…I’ll also add that I do have several other markets that VERY much interest me…among them being Gold and the row crops (Cotton and Soybean Meal in particular).
All option prices in this newsletter include all fees and commissions.
FUTURES TRADING IS NOT FOR EVERYONE. THE RISK OF LOSS IN TRADING CAN BE SUBSTANTIAL. THEREFORE, CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. THERE IS NO GUARANTEE YOUR TRADING EXPERIENCE WILL BE SIMILAR TO PAST PERFORMANCE.
The author of this piece currently trades for his own account and has a financial interest in the following derivative products mentioned within: Eurodollars