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September 13, 2017

 Harvey, Irma and the Future USA Economy

After you have been beaten to death by the markets is often when the move finally starts. Trading can be brutal (and not to forget, it can also be glorious) and how many times have you given up on an idea…precisely when you should have been jumping all over it?

I know I have, many times, but one of the reasons I have survived for 37 years in this insanity is that at times I DO get on the right side of what is happening…and we DO get some big hits as a result…But to get them, you DO have to still be there…And sometimes, the final requirement  for success in trading is you have to forget what HAS happened, and refocus on what you think WILL happen…and PLACE YOUR BET AGAIN.

I know I keep repeating this, but to put it bluntly, there are a whole bunch of you, most of whom I’ve known for many years, who have totally given up on this idea…and as I’ve said before, sitting here 3-6 months from now being able to say, “You should have done it again”, does me no good at all.

I WILL ADAMANTLY REITERATE: AS I HAVE BEEN WRITING FOREVER, I SEE NOTHING BUT A TON OF ECONOMIC ACTIVITY AHEAD FOR THE USA AND WORLD ECONOMIES… AND ASIDE FROM MY FIRM BELIEF THAT A MOUNTAIN OF PRESIDENTIAL AND CONGRESSIONAL STIMULI (AND BORROWING) WILL BE COMING OUT OF WASHINGTON, I WILL NOW ADD THAT YOU’D BETTER BELIEVE THAT THE HARVEY AND IRMA REBUILDS REPRESENT AN EVEN FURTHER GIANT STIMULUS FOR  THE ECONOMY GOING FORWARD…AND THAT, VERY IMPORTANTLY, A MONTH AGO NONE OF THIS TOTALLY NEWFOUND ACTIVITY WAS ACCOUNTED FOR IN ANY ECONOMIC FORECASTING MODEL, FOR ANY MARKET, ANYWHERE ON THE PLANET…AND WITH ALL THAT IN MIND, I WILL CONTINUE, MORE SO THAN EVER, TO SAY THAT ONE RESULT OF ALL THESE STIMULI WILL BE DECIDEDLY HIGHER INTEREST RATES…BOTH SHORT TERM (LIBOR/EURODOLLARS) AND LONG TERM (US TREASURY BONDS)…AND I CONTINUE TO EXPECT BOTH OF THOSE MARKETS TO MOVE DOWN FASTER AND  BIGGER THAN THEIR CURRENT PRICES ARE EVEN CLOSE TO REFLECTING.

 Markets can go sideways only for so long…

Eventually, they either go up or down…

Why DO markets ROUTINELY make big moves? Or, for that matter, why do markets move at all? And the simple answer is that today’s market prices reflect only what is known…that is, what HAS happened…while the future, however predictable it might seem to be according to the Yakheads and Wall Street boobs, is ALWAYS replete with surprises or economic outcomes that do not neatly follow some perfectly charted analytic course….which is evidenced by the fact, just to present a few examples, that NOBODY at the Fed or on Wall Street saw the Great Recession coming…nor did ANY of those same people foresee that the Dow would more than triple in value in the 7 years following the March, 2009 low at 6500…nor did ANY of them predict that $150 Crude Oil in July, 2008 would drop to $35 just 6 months later…nor that $1800 Gold in October, 2012, would have lost fully 1/3  of its value just 8 months later…nor, finally, that most recently, did ANY of them suppose that the Dow would have rallied almost 7000 points since February of last year. As I have documented over and over here, all those guys have basically “hated” the market for MANY 1000’s of points.

Those examples are obviously just a tiny fraction of all the LARGE moves that, as I said, ROUTINELY take place in the markets…again, none of which seemingly EVER happen the way those brokerage house herds of yakheads, analysts, and “strategists” are thinking…And I would then point out, VERY importantly, that those nitwits, with their forever flawed opinions and sheep herd mentalities, really are the PRIMARY source from which most investors get the information that becomes the basis for their own trading and investing decisions. In other words, the investing masses generally have no choice but to follow, and oftentimes act according to what all those supposed “financial industry experts” are telling them…Which, to circle back, is precisely why markets routinely make big “unexpected” moves…The “experts” unanimously spew their perennially wrong groupthink, the public ends up following them…EVERYBODY, pros and individual investors included, ends up on one side of the table…and the market goes the other way…BIG…because in the final analysis, prices ARE a function of people buying, selling, chasing…and fleeing every market we trade…For the 1000th time, I will say that the price changes of all these pieces of paper we trade are NOT due to some scientifically based formula that determines, “This market should be at  X dollars.” Not a chance. It all comes down to mob psychology. Money sloshing around. Greed. Panic. And maybe more than anything else, just a whole bunch of people being wrong…thanks mostly to the geniuses who promote and run the investment industry.

All of that “rant” is precisely why I believe it is so important to do your own individual research and thinking…and to understand that the odds historically and overwhelmingly support the idea that where any market is expected to be six months hence, is most likely NOT where it will be…And right now, the expectation regarding interest rates, and most specifically the Eurodollar and Treasury Bond markets, is that they will barely be moving at all during the next 6-12 months…

It is only natural that after months of my saying the same thing, many of you are not reading this newsletter anymore, but if you HAVE read this far, I urge you to firmly decide whether you think that my basic premises are correct…and if you do…ACT ON THIS IDEA…#*&&##%!!!..DON’T  just sit there and bemoan a ton of September put options expiring worthless. GET BACK ON THE HORSE. MAKE ANOTHER BET FOR ANOTHER 9 MONTHS OF TIME. We were VERY close to hitting it big back in March…and I think we will definitely be there again. But you have to be there, again, if you want to have the chance to do so…

Here are some charts…

I still think we are about to see a stock market ERUPTION (as in multiple 500-700 point days)…AND IT WILL CRUSH THE EURODOLLAR AND TREASURY BOND MARKETS…

9-13-17dowweekly.png

 The Treasury Bond Market is a monster Short

So the Stock Market CONTINUES  to indicate strong growth…but the amount of money that the public (and professionals) have been scared into investing in the bond market during the past few years...at the highest bond prices, and lowest interest rates, in history…is just staggering. So how many times do you need to see this sort of flood of money into a market take place to recognize what then happens sooner or later? Where the public just gets raped by Wall Street…I continue to believe that one of the biggest financial stories of 2018, maybe 2019, will be the public’s losses in the Bond market.

I THINK ANOTHER 30 POINT DOWNSWING LOOKS EASY…WITH THESE NUMBERS IN MIND, I THINK THERE IS ENORMOUS LEVERAGE IN OWNING PUTS HERE…

9-13-17bondmonthly.png

And as I have noted in previous newsletters…Bonds have a tendency to just stop dead…reverse lower…and not look back…One more time, here are a few examples of a few Bond Market reversals…which you can then compare to today’s market.

8-25-17bondtop1987.png

8-25-17bondtop1989-1990.png

8-25-17bondtop1993-1994.png

8-25-17bondtop2012-2013.png

And no, it doesn’t always have to happen as it did in these four examples…and I could show you many more…But this has been their tendency for as long as I have watched them...And with this market trading in the stratosphere, and my impression being that EVERYBODY is long, I do think this time around is going to be no different. And to be clear, I think this is a happening RIGHT NOW…beginning late last week.

9-13-17dec17bonds.png

 

I say Eurodollars are a DEAD SHORT from here…

They have been sideways for months…

AND SIDEWAYS IS ALWAYS TEMPORARY IN FUTURES

And as for short term rates…and Eurodollars…Let’s start with this...As can be seen below, rates have creeping steadily higher since last July…and current expectations are that they will either go nowhere…or just CRAWL higher (1/4% ) during the next year…BUT,  what I have seen, over and over and over in the past, is that at some point, the markets get away from the Fed…that the Fed misreads the STRENGTH  of the economy, or underestimates inflationary pressures, and all of sudden they have to start playing catch up…meaning that, during all of the past four multiple rate raising campaigns, at some point, they suddenly found it necessary to raise rates on almost a MONTHLY basis…and believe me, in not a single one of those instances, did they initially have even the slightest idea that moving faster would be where they would end up…

And right now, THE MARKETS HAVE A SINGLE 1/4% INCREASE BUILT IN OUT TO NEXT JUNE? NINE MONTHS FROM NOW? ONE INCREASE?

I say this WILL change…and just like the Bond market, that change in perception, and prices, will start happening from one day to the next…which is exactly what I think we’ve seen during the past week or so…

I MAY BE DEAD WRONG, BUT I THINK THE ODDS ARE SKY HIGH THAT THE SIDEWAYS MOVE IN EURODOLLARS ENDED LAST FRIDAY.

Here’s the actual interest rate that determines where Eurodollars are…LIBOR…Short Term (90 day) Interest Rates

9-13-17Libor1.png

Again, just because LIBOR has been “crawling” higher does not mean that it can’t TRULY start moving in much bigger fashion. In reality, I would also say that this very brief history going back to 2015 is not even close to representative as to how short term rates actually CAN move…

And similar to the Bonds, here is just ONE example of how Eurodollars also have a tendency to just stop dead, reverse, and go fairly straight down…Which, again, is exactly what I think is happening RIGHT NOW ...

5-18-17june2006eurodollardecline.png

And here is the current market…the June, 2018 contract…with 9 months of time for this put to work…or not.

9-13-17june18eurodollar.png

 A few final comments…Maybe some common sense…

I haven’t cranked up some sort of super computer to make any estimates of jobs, inflation, profits, losses, etc. for the economy but my common sense guess of what we can expect in 2018 comes down to this:

Can you think of anything even remotely related to the building industry that will be not be in short supply in the year ahead? Including finding enough materials, labor, contractors and businesses to do all the rebuilding? Not to mention replacing all the furnishings that are needed for making a house into a home, or the equipment necessary to turn a building into a business? And specifically, the inflationary impact this will have on material prices…and wages? And at the management level, do you think there is a contractor or business out there who won’t be in a “take it or leave it” situation when it comes to pricing their services? And be aware that I’m not just talking about Houston or Florida…You’ll have contractors, laborers, and raw materials being sucked AWAY towards Texas and Florida from all over the country…meaning it won’t just be in those two disaster areas where the impact will be felt…The impact will be everywhere…easily in ways than can’t be imagined right now…After all, we have NEVER seen two pronged destruction like this…

And when you then throw in the fact that all of this reconstruction is going to be done with borrowed money? Meaning more loan DEMAND?

In a nutshell…I cannot imagine that these previously TOTALLY UNEXPECTED inflationary influences AND a potentially massively increased demand for borrowed money can mean anything other than higher interest rates…And especially, when one notes that rates ALREADY were on their way higher.

I am still buying puts in both Eurodollars and Treasury Bonds. I implore you to not just sit there and think, “I’ve heard all that before.” To me, this trade is every bit as big as I thought it was last fall…Rates have been going up and I believe they will continue to do so…And yes, just as I keep saying, MUCH faster and BIGGER than the “experts” and the markets are anticipating.

THIS TRADE IS STILL ON. DON’T JUST “WATCH IT.” Really…

Give me a call…

Bill

866-578-1001

770-425-7241

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

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