July 17, 2019
One of the hardest things about this business is that you have to be able to ignore what a 1000 supposed “experts” with names you recognize, or who are from supposedly savvy brokerage houses, are saying…and go in the opposite direction.
I believe that all the “Global Slowdown” talk is Nonsense.
I firmly believe that Stocks and the World Economy are headed decidedly higher…
and that Interest Rates will therefore be going up as well.
I AM SHORTING TREASURY BONDS AND EURODOLLARS
In this business…especially with the 24-7 internet…it is not all uncommon for virtually all of the economists, “strategists”, analysts and talking head sheep to semi-unanimously jump all over a single theme, which is usually encapsulated in a single sheep herd mentality phrase that they ALL repeat ad nauseum as if there is zero possibility for it to be otherwise…which, in my experience, almost invariably turns out to be just dead wrong…totally backwards…And lately? That buzz phrase they all seem to be touting? “Global Slowdown!” Heard it anywhere?
History has shown that economists in general are essentially horrible when it comes to predicting the economic future…And when you get down to it, in my opinion, the idea of anyone among the brokerage house geniuses actually predicting the future of this gigantically complex and diverse organism that is planet Earth is just beyond absurd…and especially when their opinion is that the whole planet is getting ready to reverse a course that it has been on for decades. I mean, really, how many times do you have to hear those guys wrongly call the top of stocks or the economy to realize what I’ve statistically documented in this newsletter for years?... That being that the overwhelming majority of Wall Street’s “analysts” and “strategists”, year after year, are typically shockingly wrong, by large percentages, in their economic and stock market predictions.
As I have expressed since the early 1990’s, I believe that we are in an expansion unlike anything ever seen in history…an expansion, which, per the chart below, has been pretty much been in an acceleration phase since the turn of the century…with occasional normal hiccups of course…So, in plain English, I see the slowdown talk as just more erroneous Wall Street gobbledygook…that the USA and World Economies have a LONG way to go on the upside.
So, OK, it’s difficult enough to predict the economy of one country, but the whole planet? Nevertheless, during the month of May, as stocks really did nothing more than drift a little lower, it inspired countless supposed “experts” to jump all over the Global Slowdown Bear Market Bandwagon, thus spurring a multitude of calls that, “This is the top!”, the result being that all those same yakheads also became convinced that, “The economy is fragile and the Fed HAS to save us by sharply lowering interest rates!” Honestly, in my almost 4 decades of trading interest rate futures, I have never seen anything like it…wherein we have what I would describe as a booming economy, super low unemployment and more than solid job growth…and all these guys are sounding like we’ve suddenly entered the Great Depression? “The economy is fragile?” Absolutely nuts to me…
At any rate, in the Interest Rate Futures markets, all of this FEAR translated into what I can only describe as classic “futures market insanity”, in that trading community’s media driven PERCEPTIONS produced upside moves in Treasury Bonds (long term rates) and Eurodollars (short term rates) that I believe are totally, totally divorced from reality…and that as we go forward from here, both of those markets’ rallies will be sharply reversed as investors realize that the economy is STILL smoking…and also that Stocks are still headed into new all-time highs…and NOT stopping anytime soon…
Here is what I’m referring to…
Which led to these rallies in Eurodollars and Treasury Bonds…And remember, Eurodollars are nothing but short term interest rates…specifically 3 Month LIBOR…and they go UP when interest rates are declining…and DOWN when interest rates are rising.
And the same thing happened in Treasury Bonds…
Why I disagree with this “slowdown” mentality.
Why I think the economy is not even close to “fragile.”
I have a series of economic charts that I routinely check on the St. Louis Federal Reserve’s website that are one my guides (aside from just common sense observations of what I see happening around me) to what the economy is actually doing…And this is certainly overkill, but I can think of no other way to substantiate my opinion than by showing them to you, all of which I believe demonstrate that these ideas of a slowdown are somewhat “mystifying.”
I’ll start with the American consumer…
In the same vein, Job Creation looks strong…
Consumption is widely regarded as being 70% of what drives the economy…
Housing (and construction) are quite strong…And aside from what I can see on the charts…I say all you have to do really is look out your window…Building is going on everywhere….
Again, you can ALWAYS find some statistic or indicator that supports or argues for a negative slant…but it’s the overall picture that counts…And I could throw in a number of other graphs that, in my opinion, firmly negate this “slowdown” stuff but this newsletter already has far too much information…So I’m going to move on to another set of charts…that being a quick look at what various major stock markets are doing around the world…And let you decide for yourself if these sometimes called, “barometers of future economic activity,” seem to agree, or disagree, with all the “Global Slowdown” gibberish.
Start with here at home…
Here’s the 100+ year chart I’ve been bullishly referencing here for decades…
And here is what some of the world’s other major stock markets are looking like…Again…Ask yourself if any of them look “weak”, or if they seem to be indicating “global slowdown” ahead?
I mean, really, are all of those stock markets around the world just WRONG?
I certainly don’t think so…and what every single one of these markets suggests to me is that the world IS in a massive expansion…that nations and businesses everywhere are moving forward, trying to grow bigger…and BUSINESSES EXPAND BY BORROWING MONEY…which leads me to the essence of this newsletter: My very definite sense is then that loan demand…GLOBALLY…will only be growing and that the next and most natural conclusion to draw is that interest rates WILL be moving higher…The price of money, interest rates, is no different than any other commodity…When everybody wants it (meaning when everybody is borrowing) the price tends to go UP.
Don’t Bet Against China
But the big bogeyman being touted by the financial media is supposedly that China is slowing…and will therefore take the world economy lower with it…and I disagree with both of those ideas…And to show you part of why I disagree, here are some charts relating to China’s economy, that to me, indicate that this financial behemoth is no different than the USA…that they are by no means “weakening”, and that to bet against them is like betting against the United States a century ago…
Start with this first chart, of China’s GDP, that hit the media several days ago as being China’s “slowest growth in 17 years!”, which, on the surface would certainly lead you to think, “China must be in BAD shape.”
So…just to show you a few pertinent economic charts that I believe argue against the whole “slowdown” argument…
OK…I could give you a lot more in this same vein but this newsletter is already way too long and I think that should be enough information that demonstrates how “bad” it supposedly is in China…
So, to reiterate, same as in the USA, and anywhere really, consumers and their consumption are what really drive economies…And in China, same as here, the big picture I get is nothing but positive…and I therefore believe there is virtually no credence whatsoever to the idea that China is slowing…nor that the World is slowing…nor is the United States…which brings me to what this whole piece is really about: WHAT IS GOING TO HAPPEN WITH INTEREST RATES?
As I noted in my intro, due to the supposed “global slowdown’, the overwhelming majority of analysts and talking heads believe that interest rates will be going even lower than they are today, to the extent that the June 2020 Eurodollar futures contract has ALREADY built in over a 1/2% decline in short term interest rates between now and next June, where the current “perception” has become that Libor (90 day interest rates) will be at an astounding 1.75%...
As I have written forever, I see the markets as nothing more than a giant mob psychology game, that no value of any market is “real”, and that prices quite commonly DO become detached from reality…And specifically speaking, one more time, that is precisely how I view the current level of June 2020 Eurodollars…I firmly believe that the economy, and the stock market, will be doing nothing but strengthening throughout this year and into the next…and while that is happening, this mob psychology “certainty” of needing lower rates will be forced into shifting to exactly the opposite…that being, that rates need to go UP…And if this does become the case, it does mean that the June 2020 Eurodollar contract will have nowhere to go but somewhat sharply lower.
My recommendation is to:
Short Treasury Bonds
Short June 2020 Eurodollars
About 38 years ago, as an industrious rookie, late one night I discovered “Commitments of Traders” on the old ticker newswire we used back then. When I realized that it gave a monthly breakdown of what various types of traders (Commercials, Large Speculators/Fund, and Small Speculators) were doing (long or short), I started religiously collecting it each month and studying the breakdowns for clues to maybe predicting the markets…and rather quickly began to understand that one group of traders, that being Small Speculators, generally seemed to be trading opposite the true direction of the markets…steadily losing in other words…which made sense in that these “little” guys (like myself really) tended to be the least knowledgeable traders in the markets and therefore more susceptible to thinking you just had to follow the media’s opinion (the only real source of information) and you could make money (wrong!)…With this is mind, that this group of traders tended to be wrong, I started incorporating the Commitments reports into my analysis and have done so ever since…
In the 4 decades since, I have learned that commitments are absolutely NOT the holy grail of trading…that they do NOT axiomatically predict the direction of any market…and that they can lead you down a path toward massive losses…but they, like so many indicators, DO at times provide you with solid clues as to which way to position in a market…And though this certainly might be one of those times when this tool is “wrong”, with the fact that Small Speculators are now positioned more long Treasury Bonds AND Ten Year Notes AND Five Year Notes AND Two Year Notes than at any time in the history of futures trading…In other words, pretty much in line with this mass opinion towards lower rates, the least sophisticated traders there are, have positioned more long then EVER in all four of the major Treasury Bond and Note contract that we trade.
Is this significant? I think highly so. Does it mean that these markets WILL go down…or that rates WILL go up? Absolutely not, but with my understanding that a big part of trading IS traders entering and exiting markets, I do know that sooner or later, all of those longs WILL exit their positions, and my bet is very definitely that they will be doing it as losers…not as winners.
So see for yourself…Here are all four of those markets going back to 2000…
Again, none of those four charts means that these markets will go down…Nothing is ever that way in this business…But I would definitely rather be trading opposite this crowd…than with them.
The trade I would make here in Treasury Bonds…?
At current levels, I would buy this put…and if Bonds make a new high (156), exit the trade with a loss (which I’d estimate at about $750 per current values)…and reassess where to re-enter the trade.
And Short June 2020 Eurodollars
A little very necessary education about Eurodollars…
The first thing to understand is that Eurodollars are NOT the Eurocurrency, and really have nothing to do with Europe at all. In fact, the Eurodollar Interest Rate is really just another name for LIBOR, or the London Inter-Bank Offered Rate…and to simplify one step further, LIBOR refers to nothing more than international short term interest rates…primarily for banks and businesses…Each day, 3 Month LIBOR is calculated in London (it’s an average among banks) and that rate is then used as a base rate for loans all over the planet…as in, for example, “the rate for this loan will be LIBOR + 2%.” As such, 3 Month LIBOR is posted daily…and finally…to finish this one paragraph “education” on Eurodollars: When Eurodollar futures settle on their last trading day, their last price will be whatever LIBOR is on that specific day…And TO FULLY CLARIFY THE IMPORTANCE OF UNDERSTANDING THIS, WHERE LIBOR IS ON JUNE 15, 2020 WILL DETERMINE THE PRICE LEVEL OF THE JUNE 2020 EURODOLLAR CONTRACT AS IT GOES OFF THE BOARD…IN OTHER WORDS, ON THE LAST TRADING DAY FOR THE JUNE 2020 EURODOLLAR, IT WILL BE TRADING EXACTLY AT WHERE LIBOR IS THAT VERY SAME DAY.
So the question becomes, where will LIBOR be about a year from now?
Will it be at 1.71%, or even lower? Or will it be at 2.3%, TODAY’S RATE, or even higher?
Generally speaking, if you think the economy is going to be weaker next year, then you can maybe go with the idea that, “Yeah, the only way to prevent that is for the Fed to take rates even lower than they are now”, which would essentially mean that if, by next June, rates had dropped to 1.71%, the June, 2020 Eurodollar contract above would be exactly where it is today.
My own view, outlined throughout this newsletter, is that the USA and World Economies are anything BUT weak, and I believe it is quite possible that a year from now, the Dow will be many 1000’s of points higher, and additionally, that the media quite likely could then focused on the “global BOOM,” as opposed to the current oh-so-popular “global slowdown.” And if this is the case? If we are “booming”? Well, then I’d suggest that LIBOR will then probably be somewhat HIGHER than it’s current 2.3%...like maybe even back to where it was last fall (96.70)…or at least somewhere above 3%...And while my opinion might CERTAINLY be in error, if that is the case, it means the June 2020 would then be under 97.00.
You must always remember that the Fed governors themselves are always guessing…just like everybody else…as to what is happening next in the economy, and throughout history, they have FREQUENTLY found themselves having to totally, and abruptly, reverse their policies…just as they already have done several times in the past few years…So believe me, and Fed Chairman Powell does keep repeating it, even though the media is howling about the “NEED” for lower rates, the OPPOSITE can become the case.
As always, all of my analysis and instincts may be dead, dead wrong…but I do think Eurodollars (same as they were back in 2016 when I first shorted them) are a MAJOR sale…and my recommendation is to own puts (no calls this time) and/or to be short futures…all out in the June 2020 contract shown here.
Here’s a put I like at current levels…
And just to clarify some numerical possibilities:
If LIBOR remains the same for the next 11 months, that STILL means the June 2020 future will go off at somewhere around the 97.70 level.
If LIBOR drops by a 1/4%, and that’s it for the next 11 months, that would mean the June 2020 future going off somewhere around the 97.95 level.
And finally, if LIBOR does drop by 1/2%, and stays there, the June 2020 future would go off somewhere around the 98.20 level…and we would be looking at 1.7% interest rates.
I might be totally confused, but I just don’t think there is any need whatsoever for 1.7% money. It’s NOT 2010. The Great Recession is far, far behind us. I think the planet is going nowhere but higher…and rates will up right along with it.
I’d love to hear what you think…Really…So give me a call if you have the inclination.
Thanks for wading all the way through this.
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: Treasury Bonds, Eurodollars