March 17, 2016
Short Term Interest Rates Are Already Moving Higher
And I believe have a LONG way to go during the balance of 2016
We are now SHORT EURODOLLARS
What in the hell are Eurodollars? Every time I trade this market (it’s been years) I have to educate people as to what they actually are...
The very first thing is to make it clear that Eurodollars are NOT the Eurocurrency…and in fact, in spite of “Euro” being part of the name, Eurodollars have nothing to do with Europe…Eurodollars are dollars on deposit in banks outside the United States…anywhere in the world. The interest paid on these generally short term (90 day) Dollar deposits is referred to as the Eurodollar Rate…and this interest rate generally rises and falls in correlation with the direction of our own short term rates here in the USA.
The next thing to understand is that Eurodollars trade like the Treasury Bond market…When the Eurodollar Interest Rate is falling, Eurodollar prices go up…and when the Eurodollar Interest Rate is rising, Eurodollar prices go down (which is already beginning to happen).
In other words…The Eurodollar Futures Contract basically represents the direction of International 90 Day Interest Rates…and if those rates are going up, which is what I am fiercely expecting, Eurodollar Futures Prices are going to go down…and I think they are going to do it in a big way…and in non-stop fashion.
I am pretty sure one of the first questions I will get is, “How can you think interest rates are going up when Europe has now instituted a Negative Interest Rate Policy?” (ZIRP), to which I’ll just say: THE UNITED STATES STILL SETS THE “TONE” FOR THE REST OF THE PLANET. We pursued various forms of QE and monetary stimulation years before Europe finally decided to do so…and the fact that our Fed is has is now charting a course towards raising rates WILL be the dominant factor in what happens with the direction of international interest rates…And let’s get real, rates CAN’T go any lower in Europe…They can only go up from “zero”.
And I’d guess the next question might be, “How can interest rates be going up when there is so much worry about China and the world economy slowing down?”, with my answer being…
If you choose to believe all the financial media NONSENSE about the world economy being on shaky ground…be careful to remember that you are choosing to believe all those same analytic nitwits who were screaming “Sell Stocks” a month ago…and STILL are spouting the same garbage even though the Dow is now almost 2000 points off its mid January low.
You can choose to believe the in-your-face economic BOOM revving up here in the USA, which is STILL this planet’s indisputable economic engine…that with absurdly cheap money, dirt cheap energy, a 4.9% unemployment rate, household debt levels at 25 year lows, firmly recovering housing and construction industries, the strongest vehicle sales in 10 years, the roads and airports jam-packed, a technology expansion that STILL seems to be accelerating…AND a planet that has discarded Communism and gone full bore Capitalistic, I think it is utterly foolish to be thinking “World Slow Down” right now…For sure, at some point in the future we will be seeing another economic contraction (as is normal) but I say it is NOT right now…or even close to it…and we WILL soon be seeing the century old (at least) trend shown on the charts below continuing into new highs.
Tell me WHY, with all these positives, anyone should be betting, “This chart stops here”.
But this newsletter is not about what is going to happen with the stock market…The point is, if my perceptions about stocks and the economy are correct I believe there is NO WAY rates will be anywhere close to their current low levels 6-9 months from now…
And this is a sidelight…
As I was writing, my mind wandered back to a newsletter I wrote some years ago, thinking that the theme expressed there was pretty much the same way I am thinking now…so I went back to look at it and was amazed at the similarities between now and then…TRULY AMAZED…
WHAT I WROTE
OCTOBER 21, 2011
One more time: Investing is nothing more than an massive mob psychology game. All values are more a function of perception than anything else…ESPECIALLY, I believe, in the paper arena…that being Stocks and Bonds…And if you are prone to trusting all the media and analyst generated “logic” as to what matters in the market, I think you will perpetually find yourself always leaning in the wrong direction on the turns…
Remember the scene in Forrest Gump, where he’s a kid and the local bullies are chasing him? His girlfriend is yelling “Run, Forrest, run!”, and he starts hobbling-running down the road, slowed by his leg braces…until the braces start shattering and falling away…and then off he goes, running faster and faster? Well, that’s my image of the stock market right now…Here you have all this worry with our “jobs crisis”, Europe’s “debt crisis” and China maybe slowing (from 9.5% GDP to 9.1%?), and a mountain of financial “logic” that argues for ANOTHER recession…and how “buy and hold is dead”…and that the market’s been stuck here for 10 years…and “Look at what happened to the Japanese market. Going down for 20 years. The same may be happening here”…and that 90% of the talking heads telling you the market is going in the tank...BUT, somehow THE DOW IS NOW 1400 POINTS OFF ITS LOW MADE JUST THREE WEEKS AGO …while everybody is still yapping about volatility and the last two months of sideways quaking…and all we are seeing is just a “short covering rally”…and wondering now if the market can break through the recent two month highs…
To me, all of the above represent those braces on Forrest’s legs, which are now
in the process of being violently shaken off…and we are now in the very
early stages of a truly explosive rally in the stock market that could easily
take the Dow into, AT LEAST, the mid 13,000 area before we get to 2012.
I HAD to stick that in…And NOT to show how right I was (I am right AND wrong) but to demonstrate how this game remains the same year after year…that FIVE YEARS AGO the dumb-dumb talking heads and supposed brokerage house geniuses were spouting the SAME stupid China-Europe-Jobs-Bearish BS that they are STILL slinging today….5 YEARS AND 7000 DOW POINTS LATER? I do truly find that amazing…BUT understandable. I assure you, 95%+ of those well dressed, articulate “analysts” are doing nothing more than throwing around buzzwords and SOUNDING like they know what they are talking about…
And just to further drive home my point that the overwhelming majority of those perennially clueless guys who have been stuck on “DOUBT THE ECONOMY AND THE STOCK MARKET”…FOR YEARS…have neither changed their tune, nor gained ANY insight into what is really going on, here is a sampling of headlines I’ve collected during the past 6 weeks…WHILE THE DOW BEEN RALLYING SOME 2000 POINTS…
Really guys…Isn’t all that just a crystal clear picture of how worthless all of their “logic” actually is? And in fact, how much sense it repeatedly makes to go the opposite direction?
So, yeah…I do think this is another “Run, Forrest. Run!” situation…I CONTINUE TO BELIEVE STOCKS COULD BE FAIRLY ROCKETING HIGHER FROM HERE…AND INTEREST RATES, BOTH SHORT TERM AND LONG TERM, THEREFORE HAVE NOWHERE TO GO BUT HIGHER…WHICH MEANS EURODOLLARS AND TREASURY BONDS WILL BE GOING LOWER…A LOT LOWER.
When short term interest rates have been so low for so long…almost at zero…people and traders seem to forget that even 2.5% interest rates are still VERY LOW from a historical standpoint…And to suppose they can’t go back there (and very quickly) is like believing, “Zero interest rates are the norm”, which we KNOW would be a total disconnection from reality…So, for some long term perspective as to how low short term rates actually are…and how they can move…take a look at this chart…
Do note that when short term rates DO start moving up, they usually do so in non-stop fashion…
And here is the futures contract…which moves OPPOSITE the chart above…and again, once this market does start moving, it generally does so in a fairly straight line…
TOTALLY SIMPLIFIED SUMMARY…
Prices for all commodities are down…With RECORD WORLD DEMAND for many of them, they have no place to go but up…So SOME price inflation is coming at that level. EVERY CENTRAL BANK IN THE WORLD WANTS INFLATION…AND YOU’D BETTER BELIEVE THEY ARE GOING TO GET IT…IN SPADES I’D SAY.
Walk out your door…There are a zillion people out there driving and spending money…This is NOT price deflationary.
Help Wanted signs are popping up everywhere…in every industry except energy…WHEN BUSINESSES ARE COMPETING FOR EMPLOYEES, THE RESULT IS WAGE INFLATION.
You name it…Whether it’s Home Depot, General Electric, Microsoft, Proctor & Gamble, Wells Fargo or any other major (or minor) corporation you can think of, WITH WHAT YOU CAN SEE HAPPENING AROUND YOU (IGNORE THE STUPID YAKHEADS), DO YOU REALLY THINK ANY OF THESE COMPANIES ARE HEADING SOUTH? FACING BIG ECONOMIC TROUBLES AHEAD?...OR ARE THEY GOING TO CONTINUE DOING WELL…OR MAYBE EVEN MUCH BETTER THAN THAT?
I SURE THINK THEY WILL…AND THIS IS NOT AN ENVIRONMENT THAT FOR ANY LONGER MERITS LOW, LOW, LOW INTEREST RATES…ABSOLUTELY 150% TO THE CONTRARY.
And finally…One thing I repeatedly point out here is that the Fed does not lead the markets…It’s the other way around…which is precisely what is ALREADY happening in the Eurodollar markets where SHORT TERM INTEREST RATES, AS A FUNCTION OF THE WORLD SUPPLY AND DEMAND FOR MONEY, HAVE ALREADY STARTED MOVING HIGHER, MEANING, EURODOLLAR FUTURE HAVE ALREADY STARTED MOVING LOWER…
I AM SHORT EURODOLLARS AND WORKING TO GET MORE SHORT…As you will see below, this trade potentially has enormous leverage.
Here is how I am currently positioning….As these options are quite cheap, I am reducing the commission rate per option on this trade by 50%, from $60 to $30.
Here is the same contract, shown below as a weekly chart, going back to 2011…Eurodollar Futures, representing international lending rates, come on the board years ahead of expiration…As such, this IS the world’s biggest and most liquid futures contract.
I don’t think it gets any better than this…And these are not pie-in-the-sky numbers…Eurodollars CAN easily knock off 75-100 points, or more, from here…And even then, we would STILL be sitting at VERY low interest rate levels…
And one thing I would absolutely caution you to NOT do is: Sit here and wait until you can hear a whole bunch of people suggesting the same thing…OR to think you should wait until the FED actually TELLS you, “We’re raising rates”. As I’ve written countless times for decades, THE MARKETS LEAD THE FED, NOT THE OTHER WAY AROUND. INTEREST RATES TYPICALLY GO UP…IN THE MARKET PLACE…LONG BEFORE THE FED ACTUALLY MAKES IT “OFFICIAL”.
I see this as a great, great bet…As I noted…This has a ton of time to work…And I am no genius, and as always, I might be dead wrong…BUT I THINK THERE IS NO WAY RATES ARE STILL GOING TO BE AT THEIR CURRENT LOW LEVELS 6-9 MONTHS FROM NOW…AND TO BE UP A HALF OR FULL PERCENT? I THINK THAT WOULD BE NOTHING…
Give me a call and do something with this…
All option prices in this newsletter do not include the 1 cent NFA fee charged on all trades.
The author of this piece currently trades for his own account and has financial interest in the following derivative products mentioned within: Eurodollars, Treasury Bonds