March 14, 2019
To me, these few charts following tell the whole story…The Stock Market and Crude Oil both sold off sharply from October to December…while Bonds and Eurodollars concurrently rallied as economic and bear market fears became the predominant “wisdom” of the day…and the idea of a dovish Fed, even to the point of suggesting lowered rates, became popular among analysts, economists and talking heads.
However, to put it mildly, the Stock Market HAS reversed to the upside…TOTALLY I would say…and is likely headed into new all-time highs. Let all the geniuses talk themselves blue about the current economic media theme du jour of a “world economic slowdown,” which I can only classify as a stale and SO-yesterday story that foolishly ignores the GLOBAL ECONOMIC INERTIA THAT HAS BEEN PRESENT FOR THE PAST 30-40 YEARS …For my part, I continue to see NOTHING in the real world that implies anything but vibrant growth…here, in Europe, in Asia…anywhere you want to name.
The significant point I do want to make here is that the Interest Rate Markets DO frequently trade opposite Stocks and Crude Oil (for somewhat obvious reasons that I won’t go into here)…and if I am correct that both Stocks and Energy are only heading higher from here…I can then only assume that a monster downside move is now tremendously overdue in Eurodollars and Treasury Bonds…And I believe that ANY downside day (like today) in these two markets, could literally be the beginning of something akin to an outright crash…in both of them.
Here is what we have seen in these 4 markets for the past year…And specifically, what they have been doing since October…when the Stock Market “scare” convinced everybody on Wall Street, almost overnight, that “The economy is fragile” and that “You’d better get ready for the next recession.”
To be clear, I believe the reason for Eurodollars and Bonds not having definitively started lower (YET) is that the analytical and trading masses are STILL not believing the strength in stocks and the economy…and they therefore continue to buy the ED’s and Bonds with the idea that rates must be either staying low…or are even heading lower…BUT…sooner or later (or immediately), as stocks make more and more bullish headway, I expect to see the absurd notion of lower rates get blown out of the water…and with, it WE WILL SEE SHARP DECLINES IN EURODOLLARS AND TREASURY BONDS…I mean, really folks, IT’S NOT EXACTLY 2008 AGAIN OR ANYTHING…? And interest rates STILL are EXTREMELY, EXTREMELY low relative to century long historical norms.
WHETHER YOU WANT TO CALL IT INVESTING…OR SPECULATING…
WHEN YOU PUT MONEY ON THE TABLE IN HOPES THAT OWNING PIECES OF PAPER WILL EARN YOU A RETURN…
YOU ARE PLAYING A GAME…REALLY, THE WORLD’S BIGGEST VIDEO GAME.
And as I have repeatedly stated, price changes in all of the markets are more a function of mob psychology than anything else…that whether a market is going up or down is directly connected to the masses getting into…and out of…media generated ideas…wherein the public (which includes the supposed “pro’s” on Wall Street) is either CHASING a market…or RUNNING FULL BLAST to get OUT of one…And THAT is specifically what is coming, I believe, in the interest rate contracts…i.e. A TON OF SELLING AS THE CROWD EXITS TREASURY BONDS, TEN YEAR NOTES & EURODOLLARS.
To further clarify my perspective, check out the next chart…Commitments of Traders, which breaks down market participants into three groups…Commercials (who actually use the markets to hedge), Large Speculators (otherwise known as the “Funds,” which does NOT mean they are smart) and then Small Speculators (generally regarded as being the least sophisticated traders…like myself maybe). And these Small Specs are what have REALLY gotten my attention…
TO BE CLEAR…At the beginning of October, Funds and Small Speculators were VERY short virtually all of the interest rate instruments and they got CLOCKED with the Stock-Scare rally that took place in Notes, Bonds and Eurodollars…And now? They have now totally bought into the idea of the Fed perhaps needing to lower rates…to the end that SMALL SPECULATORS ARE NOW NET LONG TEN YEAR NOTES FOR THE FIRST TIME IN 18 YEARS…In other words, with Notes and Bonds having basically been in a bull market for decades…ending in 2016…Small Specs leaned overwhelmingly to the short side to the extent that that had been net short CONTINUOUSLY since 2001…and now they are LONG?
Stocks are going higher. The economy is growing stronger…And Interest Rates are going higher…And I continue to maintain that 4-5 months from now, all of the currently “cautious” or outright negative analysts and yakheads will have dramatically changed their tune and THEN be starting to worry about the economy “overheating”…And by that time? Interest rates will have ALREADY moved higher…and Eurodollars and Treasury Bonds will ALREADY have fallen sharply lower…My very strong opinion anyway…
It is so important to remember that what we are actually trading is the FUTURE…and NOT the present, or the past…With this in mind, it is highly imperative that you DO have SOME idea of what you expect the headlines to be 6 months from now…and NOT what you see in today’s Wall Street Journal or what you hear from all the so “eloquent” know-nothings on TV or the internet.
For one thing, what NONE of them ever cites, as I have been writing for 20 odd years, is the whole thing about the HISTORIC and unprecedented global expansion of capitalism…AND the still exploding Technology Revolution, and with it 1000’s of new products for CONSUMPTION and 100’s of totally NEW INDUSTRIES…And commensurate with all that, the immeasurable impact of what several BILLION new upwardly mobile consumers in Asia actually means. No, everybody in China and India is not being lifted up and out making and spending money…but plus or minus a few 100 million doesn’t matter.
THE USA AND WORLD ECONOMIES ARE STILL EXPANDING…EXPONENTIALLY REALLY…AND THIS LIKELY DOES MEAN HIGHER STOCKS…AND HIGHER INTEREST RATES.
Here are the trades I’d make at current levels…
Okay…If you have read all this, and you disagree with me, I would REALLY like to hear what you see that I am missing.
And if you do agree with me, and you have the risk capital, I urge you to make the move… The leverage is here right now…This Eurodollar option that is at 11 today can EASILY jump to 14 with one or two decent down days…And I’d also add that I don’t just draw these chart possibilities randomly…After looking at a million charts, I do have somewhat of an understanding of the way markets can move…and DO move.
And do NOT forget the row crops…In the past 3 days, Wheat is up 24 cents ($1200 per futures contract), Cotton up 1 cent ($500), Corn up 8 cents ($400) and Soybeans up 8 cents ($400 per futures contract).
Come on guys…This crap about rates staying/going lower is just that…And like I keep repeating, I have never seen so many ag analysts so damn ready to “Sell any rally.”
Pick up the phone…I think the next 3-4 months could see some incredible action…
Thanks for reading…
And P.S. IF YOU ARE A COMMERCIAL BORROWER OF MONEY, SHORT TERM OR LONG TERM, I STRONGLY RECOMMEND THAT YOU LOCK IN TODAY’S RATES FOR AT LEAST THE NEXT FEW YEARS…I THINK IT IS SHEER FOLLY TO BELIEVE THAT TODAY’S CURRENT PRICE OF MONEY, STILL AT ALMOST ZERO IN SOME PLACES, HAS ANYWHERE TO GO BUT UP…AND THEN STAY UP.
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, Treasury Bonds, Corn, Wheat, Soybeans, Cotton.