January 19, 2017
With new lows in Eurodollars today,
Rates are ALREADY moving higher
The March and June Eurodollars closed into new one year lows today…I believe they are now breaking out to the downside in a continuation of a trend that will extend well into 2018.
Since the July highs, June Eurodollars have already come down by over 60 points…representing more than a 1/2 % increase in short term interest rate expectations…while the Fed has so far only raised rates by 1/4%...And as I have written many times, this is simply the way it generally always works…THE MARKETS MOVE AHEAD OF, AND LEAD, THE FED…NOT THE OTHER WAY AROUND…AND THE MARKETS ARE ALREADY PUSHING RATES HIGHER…AND EURODOLLARS LOWER.
In fact, LIBOR, which leads the Eurodollar market has been closing at higher levels every single business day since we started 2017.
My point is, ignore all the chatter about “if, when and how much” the Fed will raise rates…They WILL be raising them…and I believe they will be raising them even faster than the current market perceptions that barely have a 1/4 % increase built in by June of this year…especially when the overwhelming majority of current economic data is signaling rock solid growth…4.7% unemployment, 3% GDP, wage growth, retail sales, etc…and ESPECIALLY when we are about to see Trump and Congressional economic stimulus packages out the yin yang…
THE ECONOMY WILL BE ACCELERATING, NOT SLOWING…AND THE FED, WHICH I BELIEVE IS ALREADY BEHIND THE CURVE (any actions they take won’t really have an impact on the markets for a full year), WILL FIND IT NECESSARY…AS HAS BEEN THE CASE MANY TIMES IN THE PAST…TO MOVE RATES UP FASTER AND BIGGER THAN ALL THE SHEEPHERD ANALYSTS AND TALKING HEADS ARE CURRENTLY ANTICIPATING.
And let’s get real…A 1/4 or 1/2 or 3/4 percent bump in rates DOESN’T really slow anything or anybody down…which is precisely why, when rates ARE in a rising cycle, they go up cumulatively in whole numbers (1,2,3 or 4%) during the course of a year, and NOT in tiny fractional increments. I maintain that all of the analyst’s chatter about if and when they’ll go a quarter is myopic…and just the usual wasted, talking head hot air.
And just as a reminder…Again, yes…Here is how big and fast the Fed moved rates in the past four rate raising cycles…
Feb 1988 to May 1989 – From 6.5% to 9.75% - 3.25% INCREASE IN 15 MONTHS.
May 1994 to Feb 1995 – From 3% to 5.25% - 2.25% INCREASE IN 8 MONTHS.
June 1999 to May 2000 – From 4.75% to 6.5% - 1.75% INCREASE IN 11 MONTHS.
June 2004 to June 2006 – From 1% to 5.25% - 4.25% INCREASE IN 24 MONTHS.
And for what it’s worth, yesterday’s Consumer Price Index (Inflation Gauge) is something I think are going to see more and more of…and you’d better believe nobody at the Fed wants to see inflation become a problem…And no, it currently is not…but for a number of reasons (in another newsletter), I think it potentially WILL be…
Enough said…I think this move is shifting to a HIGHER GEAR. I continue to recommend buying puts in the September contract…
Here are a few charts…This first one may be a little confusing…Give me a call if that is the case and I will explain…
To be clear, the market has only a .20 % increase in rates built in out to June…I think we could easily see a 1/4 % move Feb 1st or March 15th…and THEN be looking at the idea of rates REALLY beginning to move…As noted in previous newsletters, when the Fed gets going, the tend to go at every meeting.
And here is the same option I have been recommending the past few weeks…and continue to recommend…
I’m looking at the chart above and just thinking, “Couldn’t look ANY better. “ The truth is, this looks very much like a yearlong top has been completed…and the move down, which I believe is imminently about to become something of an outright collapse, is just now getting started…And while I might be dead, dead wrong and this therefore might not work, I will take this set up 100 times in a row.
If you think what I am proposing makes sense, and you have the RISK capital and temperament for an investment like this…where you can lose every dime you spend...PICK UP THE PHONE AND LET’S TALK.
And for those of you who are already on this, I continue to recommend using this September contract to ADD to your position size…and get us some extra time…I DON’T THINK THIS DOWN MOVE WILL BE ENDING IN JUNE…FAR FROM IT.
All option prices in this newsletter include all fees and commissions.
The author of this piece currently trades for his own account and has a financial interest in the following derivative products mentioned within: Eurodollars