December 1, 2016
The following statement was made yesterday (Wednesday) by Dalllas Fed Governor Robert Kaplan:
“I don’t want to predict where the path of the fed funds rate will be. All I can tell you is we make policy on employment and inflation. If we see higher rates of GDP growth, you’ll see us respond accordingly,”
There are several points of note here…the first being that he is telling you, “We don’t know what is going to happen”…and the second being that if GDP growth is accelerating (and I firmly believe it IS), “respond accordingly” can easily mean the Fed could be moving rates up MUCH faster than investors and the markets are currently anticipating…And I also definitely believe THAT will be the case, simply because for over 30 years I have seen the analytic masses ROUTINELY be more wrong about the interest rate markets than any other market we trade.
To further substantiate this possibility, the same sentiments were also expressed in mid October by another Fed Governor, Boston Fed President Eric Rosengren:
“My own view is that if the unemployment rate falls as much as I’m expecting, then it is possible that we’ll have to raise rates faster than the summary of economic projections,”
Rosengren noted in the interview that his “outlook for the pace of interest rate hikes is also faster than the market has priced in.”
The June 2017 Eurodollar contract currently has less than a 1/4 percent interest rate increase built in to its price between now and next June…which as I have repeatedly stated...is, I believe, absurdly underestimating the size and speed of increases in interest rates raises we will be seeing as the US economy ROARS into 2017…As I have written all year, the economy is already in the beginning stages of an outright boom, which when combined with the spending and stimulation we are about to see from Trump and BOTH parties in Congress, leads me to expect that the coming year will result in some ASTOUNDING economic numbers, both in growth AND inflation…which, I believe, can then only culminate in some equally astounding interest rates…Although I have no specific targets in mind, the more I consider the implications of what will be coming out of Washington…and spreading worldwide…the more I expect to see my target of 98.00 on the June contract easily exceeded.
The truth is, however, we are still measuring what is happening in 2016, and I still turn this machine every day expecting to see MORE reports coming out that indicate how vigorous I think the economy ALREADY is…including tomorrow’s 8:30 AM jobs number…As I keep noting, at some point I fully expect to see one of those mindblowing economic numbers that have ALWAYS been a part of this game…where all the Wall Street geniuses and internet yakheads are unanimously certain about an upcoming event or statistic, and its ramifications…and then are just DEAD, DEAD WRONG…which, as I’m sure I don’t need to remind you, was precisely the case after the election…To be clear, I think any given report, like tomorrow’s Employment numbers, could be the one that truly produces some degree of an absolute collapse in Eurodollars…wherein all this mindless talking head chatter about “when the Fed will move” or of “gradual increases in rates” just gets blown right off the map.
I CONTINUE TO RECOMMEND BUYING PUTS IN THE JUNE (AND SEPTEMBER ) 2017 EURODOLLAR CONTRACTS...I CONTINUE TO BELIEVE RATES ARE GOING UP FAR FASTER AND BIGGER THAN THE MARKETS ARE CURRENTLY REFLECTING.
Here are options I like at current levels…
As I keep saying, if you think this makes sense, and have the risk capital AND the temperament for this sort of nutty investment, give me a call.
Also, if you are already on this idea with me, I think this September 9862 put is the perfect option for increasing the size of your position.
I have NO idea if tomorrow’s report is “the one I’ve been looking for”…or for that matter if such a report is ever coming…but if there is something you want to get done BEFORE the 8:30 AM report, feel free to call me…tonight or early in the morning…This market is open almost 24 hours a day.
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