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Attachments: Yieldjunkie's Short-term Sentiment: Indices, Macro Risk Env
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Yieldjunkie's Short-term Sentiment: Indices, Macro Risk Env

Quoting Pair-me-up
{image} {quote} Thanks for your valuable time that you used for a great response. I will check out that book for sure. I don't trade the NQ yet.. but one of the discord channels that I am on...well.. just about everyone and their dog trades the NQ or the ES, etc. I think only one member of the group is good at the fundies like you. But I think you beat them. ha ha ha. This week I have been long the MYM. This is my second trade of the week. I am up over 1000 ticks this week so far. but I do feel that with more fundies added to my tool box, I can...
Nice trade! IMO a working awareness of fundies is necessary to manage risk and keep from blowing up accounts.

And it should be implied, but is worth mentioning anyways, that being up to speed and aware of global and market-moving breaking news is paramount to put FA to use successfully. FF does a great job covering this between the breaking news and calendar.
Quoting yieldjunkie
Factor 3: The market has priced in too-much post-covid-normalcy and while some parts of the globe may return to pre-covid economic behavior, many don't recover nearly as fast or at all.. causing supply-chain and international trade/growth havoc. Thus, equities fall in a traditional sense and rather than UST yields rising, they fall further owing to crowded buying of safety assets. This third factor wouldn't necessarily end poorly for my trade, as it's difficult to perceive a redux of the stay-at-home tech trade seeing as prices hardly even fell.....
This is the scenario that generally ended up playing out. The only part of this that didn't play out was the part where equities fell and my trade cashed out . I underestimated the Fed's ability to seemingly flex their mandate and continue support.

In all, I'm content with how this played out. Next time I'm going to be a little quicker to update my convictions appropriately and cut losses, but if I were given the same data again you could bet your ass I'd take the same trade.



I can't remember how much I spoke of inflation, but I think its fair time I updated my view: ~85% of inflation is "transitory" which to me means 1-4 years. The rest is sticky in two ways: 1) Traditional inflation, because I believe that the economy can't simply "shake-off" the events of the past two years. 2) In the form of permanent changes to supply-chain logistics, driven by the disruptions of the past year.

With that said, a friend of mine recently mentioned the Fed's seemingly massive fear of deflation. After some thought, I think this is spot-on. I'll be back here soon enough to try to elaborate.
Quoting yieldjunkie
I can't remember how much I spoke of inflation, but I think its fair time I updated my view: ~85% of inflation is "transitory" which to me means 1-4 years. The rest is sticky in two ways: 1) Traditional inflation, because I believe that the economy can't simply "shake-off" the events of the past two years. 2) In the form of permanent changes to supply-chain logistics, driven by the disruptions of the past year.
There have been major developments since my last post in August.

The Russia/Ukraine events strongly reinforced my belief that supply-chain logistics have permanently changed and will have a lasting impact on the volume of goods pumping through the global economy.

I don't believe that razor-thin-margined supply chains, which could be considered a staple of the last two or three decades, will take the same path back to their former glory. I think markets for consumer goods will eventually return to the same levels of cost efficiency but it will be mainly due to technological changes and productivity improvements, rather than a snapping-back of globalized supply chains which lean on efficiency over resiliency. Implications for inflation here are significant as are the geopolitical implications (aside from RU/Ukraine) as food and energy supply constraints rub against inelastic consumer demand.
Quoting yieldjunkie
The Russia/Ukraine events strongly reinforced my belief that supply-chain logistics have permanently changed and will have a lasting impact on the volume of goods pumping through the global economy. I don't believe that razor-thin-margined supply chains, which could be considered a staple of the last two or three decades, will take the same path back to their former glory. I think markets for consumer goods will eventually return to the same levels of cost efficiency but it will be mainly due to technological changes and productivity improvements,...
This article does a much more eloquent job of explaining: https://www.woodmac.com/press-releas...2.5-this-year/

Quote
“More importantly, the global economy could be looking at more permanent changes. If the Covid-19 pandemic highlighted a need to shorten supply chains, the war in Ukraine underscores the importance to have reliable trading partners. These forces could lead to a lasting realignment of global trade. The global economy becomes more regionalised — shorter supply chains with ‘reliable’ partners. It is not the end of globalisation, but global trade could reorganise into two or more distinct blocs.
Quote
“In the short term, regionalisation could reduce efficiency, increase transaction costs and prolong higher inflation. It could also weigh on productivity growth over the longer term. If so, our downside scenario would see the global economy suffer a sustained loss of output.”
Quoting yieldjunkie
{quote} This article does a much more eloquent job of explaining: https://www.woodmac.com/press-releas...2.5-this-year/ {quote} {quote}
Do you think this can be found on charts with a good level of reliability?
Luck has no place in trading. Leave that for the poker table.
Quoting Pair-me-up
{quote} Do you think this can be found on charts with a good level of reliability?
Great question. Aside from seeing it presumably show up in major figures like contracting GDP, where it would show up the slowest and extremely confounded with other factors, there is likely useful supply/inventory/delivery/productivity data where it could be found on a more isolated level and timely frame. Let me think on this a bit
Quoting yieldjunkie
{quote} Great question. Aside from seeing it presumably show up in major figures like contracting GDP, where it would show up the slowest and extremely confounded with other factors, there is likely useful supply/inventory/delivery/productivity data where it could be found on a more isolated level and timely frame. Let me think on this a bit
I look forward to your analysis on this and I am still waiting for you to come add your economic analysis to my economic channel.
Luck has no place in trading. Leave that for the poker table.
Quoting Pair-me-up
{quote} Do you think this can be found on charts with a good level of reliability?
I think the answer is: No. I don't think you can find this on a single or even a few charts with reliability unless you are looking at purely the results, which would show as a component of trade, GDP, inflation, etc. and would be difficult if not impossible to accurately isolate. To do this right and in real-time you'd have to take a bottom-up approach by looking at the inputs of major industries and working upwards to isolate the effects. I.e. a shit ton of homework

PIMCO lends some credibility to the challenge here.

You could definitely gain some insight, with a side of analysis-paralysis, from digging into the detail breakdowns of the following data:

  1. ISM Manufacturing PMI, https://www.forexfactory.com/calenda...#detail=123116
  2. Factory Orders m/m, https://www.forexfactory.com/calenda...#detail=124742
  3. Capacity Utilization, https://www.forexfactory.com/calenda...#detail=124758
  4. Industrial Production m/m, https://www.forexfactory.com/calenda...#detail=124757
  5. Prelim Wholesale Inventories m/m, https://www.forexfactory.com/calenda...#detail=124311

We'll know whether this is right in several years time if trade volume of finished goods, adjusted for price and less productivity advancements, is smaller than it was pre-2020.

Quoting Pair-me-up
I am still waiting for you to come add your economic analysis to my economic channel.
I'm not a fan of private channels, but am happy to discuss economics in this thread
Quoting yieldjunkie
{quote} I think the answer is: No. I don't think you can find this on a single or even a few charts with reliability unless you are looking at purely the results, which would show as a component of trade, GDP, inflation, etc. and would be difficult if not impossible to accurately isolate. To do this right and in real-time you'd have to take a bottom-up approach by looking at the inputs of major industries and working upwards to isolate the effects. I.e. a shit ton of homework PIMCO lends some credibility to the challenge here....

Nice info. Here is my price action trade that I took with 2 micro contracts on the Nasdaq. I use zero lagging indicators such as MACD, EMA, SMA, stochastics, etc. But over the weekend I was trying to learn a few more things from the economic side. The channel that I go to is a free community, there are a a small handful of traders, maybe only 2 of them are good at economics like you.. but I think you are a tad higher.
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Luck has no place in trading. Leave that for the poker table.
Something else that I'd like to put a pin in is consumer demand.

It's pretty tough to see consumer demand staying equal or strengthening with the ongoing pervasive inflation. This inflation can be sneaky, too, since firms like Amazon can raise prices indiscriminately and in ways that are difficult to actually notice.

Much of the inflationary factors associated with RU/Ukraine, particularly related to finished goods, will take time to make their way to the end-user and in the meantime the average US citizen cannot escape the inflation discussion in the current news cycle. That ain't great for sentiment. Even worse for sentiment is the inability to afford goods after an unprecedented period of increasing wealth effects largely tied to financial assets, and, largely owing to US govt support.

Consumer credit notched an all-time high in March, just in time for rising rates. Revolving credit is the pain-point here because those rates will rise with fed funds rate. Debt maintenance is about to become more expensive. I'm going to keep an eye on this.
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Personal savings, which were through the roof owing to US fiscal support tied to covid, have fallen precipitously to pre-covid levels. I'd also hazard a guess that personal savings are more-skewed towards the richer citizens than they were before covid but that's beside my point. I'm also going to keep an eye on this.
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Seems like consumers have spent their covid-govt-boosted savings and are possibly fueling living expenses, at increasing unit costs, using credit which has an increasing cost of debt maintenance as the fed raises rates. It may not be a bad idea to bet against credit card companies like COF (currently $137.88/sh) as non-performing assets rise - though it may be a tad early for that.

Other things on my radar:
- Shanghai lockdowns and resulting port congestion, supply chain issues.
- Food inflation, a serious issue for poor or developing countries and a serious inconvenience for developed.
- US Student loan moratorium, which shouldn't go on forever.

Everything that I'm seeing seems to point towards consumer demand destruction and continued strong, but nowhere near "hyper", inflation. I'm not betting on relief as it relates to the supply-side inflation drivers, so, the question is how much consumer demand destruction will be needed to quash inflation in the eyes of the fed. I'm doubtful that the fed will need to surpass the last hiking cycle (2.50%).

As far as trades go.. I'm sitting tight with my commodity-skewed portfolio, scheduled allocations, plenty of cash on the sidelines, and am looking towards a ~6-9 month timeframe where physical assets like real estate start to become attractive (assuming only a few years of peak debt maintenance costs before fed cuts again.)
Quoting yieldjunkie
Something else that I'd like to put a pin in is consumer demand. It's pretty tough to see consumer demand staying equal or strengthening with the ongoing pervasive inflation. This inflation can be sneaky, too, since firms like Amazon can raise prices indiscriminately and in ways that are difficult to actually notice. Much of the inflationary factors associated with RU/Ukraine, particularly related to finished goods, will take time to make their way to the end-user and in the meantime the average US citizen cannot escape the inflation discussion...
Hoooooly shit! Consumer credit absolutely demolished forecasts of ~25B, coming in at an all-time high of over 52B! The second highest reading was last month's revised 37B.

Non-revolving credit shrank while revolving credit, which becomes a debt-maintenance pain point when rates rise, notched an all-time high of over 31B! The second highest revolving credit reading was 19B. This affirms my thoughts on consumer health and possibility of demand destruction.
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  • Post #52
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  • Edited 3:00pm May 27, 2022 2:46pm | Edited 3:00pm
There are quite a few things I can update here but I'll try to keep it short.

Quoting yieldjunkie
Personal savings, which were through the roof owing to US fiscal support tied to covid, have fallen precipitously to pre-covid levels.
Quoting yieldjunkie
Seems like consumers have spent their covid-govt-boosted savings and are possibly fueling living expenses, at increasing unit costs, using credit which has an increasing cost of debt maintenance as the fed raises rates.
Today's data intensified this trend:
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An increasing amount of otherwise decent-to-high-quality financial sources are discussing "healthy US consumer balance sheets" while referencing 2021 EOY DATA.

See the problem here? Consumers at the end of 2021 were in a vastly different position than they are now.

Though the data isn't identical, here is a great example from this month: https://www.blackrock.com/us/individ...cial-hurricane
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We'll see the next piece of consumer spending data on the 7th. Zerohedge gets it.
Quoting yieldjunkie
Something else that I'd like to put a pin in is consumer demand. It's pretty tough to see consumer demand staying equal or strengthening with the ongoing pervasive inflation. This inflation can be sneaky, too, since firms like Amazon can raise prices indiscriminately and in ways that are difficult to actually notice. Much of the inflationary factors associated with RU/Ukraine, particularly related to finished goods, will take time to make their way to the end-user and in the meantime the average US citizen cannot escape the inflation discussion...
Seeing several pieces fall into place over the past week:

  1. Consumer Credit: still growing at near-ATH amounts, total revolving credit outstanding at ATHs
  2. US CPI: higher than expected

and, finally..

  1. Consumer Sentiment: record low

Ultimately the Fed is getting exactly what is needed to quell inflation: consumer demand destruction. We're seeing pain in the form of falling financial asset values and corresponding negative wealth effects, but I think we have a long way to go.

I don't think we'll see the Fed with a 75bps raise at this week's meeting, but it's worth noting that futures are pricing in an implied raise of +73bps and several major banks have revised their expectations upwards (50 -> 75bps) in the past few hours.

I expect that we see three more +50bps raises and then, after September's meeting, +25bp raises through the end of the year. If futures price in something significantly higher than +75bps in the next 12hr, I'd see +75bps as more likely. Should be a pretty exciting week.

  • Post #54
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  • Edited 1:44pm Jun 14, 2022 1:33pm | Edited 1:44pm
Quoting yieldjunkie
I don't think we'll see the Fed with a 75bps raise at this week's meeting, but it's worth noting that futures are pricing in an implied raise of +73bps and several major banks have revised their expectations upwards (50 -> 75bps) in the past few hours. I expect that we see three more +50bps raises and then, after September's meeting, +25bp raises through the end of the year. If futures price in something significantly higher than +75bps in the next 12hr, I'd see +75bps as more likely. Should be a pretty exciting week.
I still don't expect more than +50bps at this week's meeting, but after thinking on this.. it could be the case that the fed is seeing significantly more job losses in the coming weeks than what the market expects, which would limit their timeframe for raising rates and force them to fit more raises in a shorter period of time.. while they still have only one mandate that needs to be addressed.

Depending on this week's meeting, presser, and economic projections.. we may see +75bps as the preferred path at the July meeting.
  • Post #55
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  • Edited 3:27pm Jun 15, 2022 3:14pm | Edited 3:27pm
Quoting yieldjunkie
{quote} I still don't expect more than +50bps at this week's meeting
Wrong!

I was wrong to lean against what the market was aggressively pricing in. Powell mentioned in the presser that last week's Umich survey data paired with CPI (presumably m/m) were factored into the decision.

Quoting yieldjunkie
As far as trades go.. I'm sitting tight with my commodity-skewed portfolio, scheduled allocations, plenty of cash on the sidelines, and am looking towards a ~6-9 month timeframe where physical assets like real estate start to become attractive (assuming only a few years of peak debt maintenance costs before fed cuts again.)
The new rate outlook bodes well for my trade focus, mainly the real estate componentry, as peak rates would hardly last 5/10/15/30yrs while outright prices seem likely to fall enough to significantly offset ~2-3yr of peak debt maintenance at higher rates. I'll consider slow reduction of my commodity exposure given the growth outlook, but, I do like those positions long-term so I'll likely keep exposures skewed in that direction.

This feels like a far more interesting market than what I can remember!
Rather than writing a long update on my views of the current state of macro, I'll post this video.
Inserted Video
  • Post #57
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  • Edited 11:16pm Oct 6, 2022 3:26pm | Edited 11:16pm
There isn't much to say about the macro outlook that hasn't already been said. There is currently no reason for the US Fed to slow tightening, and the amount of global tightening is the most dramatic and ubiquitous move we have seen in modern markets. I'm uncertain how long the non-US market can withstand the direct and knock-on effects of this and would imagine that we see some exogenous shock before internal justification for a reversion to the prior regime of US monetary policy.
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Next interest is to look for where issues may emerge. The following is on my radar, in no particular order:

  1. China playing IMF with their Belt and Road initiative, which was fine and dandy in an easy-money environment but not so much in a tighter environment with a very strong USD. I suspect that China is not able to respond as tactfully as the IMF (190 member countries) as it relates to actually dealing with EM crises. Weak growth and property market issues exaggerate weakness.
  2. EU -> ECB stability. With the energy crisis in the EU worsening, and a fundamentally diverse mix of fiscal policy across very different member countries, it will become increasingly difficult for the ECB to properly transmit monetary policy for extended periods of time through stress. For central banks to effectively operate in challenging environments alignment between monetary and fiscal policy is a major catalyst for success. Even with the ECB's new transmission mechanism (buy bonds of specific countries), a member country crisis forces them to operate in conflict with rising rates without doing much more than slapping a band-aid onto the problem. I'm not sure how the ECB would hold-up under extended periods of this. Iguess there's always the US Fed as lender of last resort... right?
  3. Russia. I unfortunately don't see a likely outcome where Russia refrains from using small scale nuclear weapons. Coup? maybe. Retreat and propaganda? ehhh. I'm also not certain how NATO would actually respond to this situation while assessing the excruciatingly small but real risk of massive loss of human life and natural resources.

The US is in pretty manageable shape. Perks of being the world's reserve currency. I'm keeping an eye on the following:

  1. Consumer health is still a concern that could cascade, maybe via buy now pay later firms after having over-leveraged into unproductive assets.
  2. Hangover of misallocation of capital over the past two years seems likely enough to mildly weigh on growth over many years.
  3. Liquidity of the residential property market is incredibly dry and drying further, which breeds fragility. The commercial market for real estate could have some hang-ups due to the structuring of financing which sometimes(?) relies on required cap rates.


Now feels like the time to start carefully adding risk. Bonds look more attractive than they have in a while, and are finally more deserving of their seat in the "traditional portfolio." For context, I prefer a heavy weighting towards stocks via indices, skewed towards small and mid-caps, and paired with strategic allocations into/out of commodities and cash/equivalents. Maybe it's because I get entertainment utility from asset allocation

On the less careful side, iguess I'd look for mispricing among advantaged EMs as larger cracks appear. It feels early.. but it always feels early until it's too late

As far as FX goes, buying USD weakness feels like a strong base.

  • Post #58
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  • Edited 4:20pm Dec 15, 2022 2:17pm | Edited 4:20pm
Posting this here for reference: https://www.forexfactory.com/news/1194883-sea-change

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Not many posts because there still isn't much to say. I came back here to make a note of something that recently occurred to me related to the "bull case" for risk.

A material shift in behavior and composition of market participants could be to blame for resiliency in risk assets, with the avenue being two flavors of time. I'll need to examine data to prove or disprove this but I suspect two things:

  1. The average time horizon of investors is longer than it has been in the past (i.e. younger market participants comprise a larger $ portion of the market.)
  2. The average duration of invested dollars in risk assets is shorter than it has been in the past (i.e. asset turnover is higher, and interest rate risk is realized on a significantly shorter time frame thus dulled.)

If true, this would muddy the view for those examining the current market through what may be an outdated framework of who the average participant behind each dollar is.

  • Post #60
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  • Edited 11:34am May 26, 2023 9:43am | Edited 11:34am
I think the most relevant, and mispriced, risk right now from the market's point of view is that US inflation accelerates.

I'll outline the case for this below:

Fed funds futures have been, to my continued shock, pricing in cuts by year end for quite some time. If the US Fed simply holds rates where they are at, for an extended period of time like they have said they would, we'd see a huge rolling pain trade. As far as the market is concerned here, extended upward pressure on inflation and further hikes are very far from being priced in.

Weakness in market sentiment has been focused on the, still resilient, US Banking system and while I think we are yet to see the last bank sink there's little to see as far as a total collapse scenario. After the prior banking issues this year, this as a "tail risk" feels softer, and largely mitigated through market awareness and positioning. As far as the US Debt ceiling goes... yawn.

For the "why" about US inflation, there are quite a few situations that at best result in no change to inflation and at worst are likely to be inflationary - the most prominent of these in my opinion are related to the geopol landscape (i.e. China/US and the chip business). Layer this atop the historically resilient US consumer, who has a history of leading markets through perceived turmoil through their magnificent ability to continue spending. Inflation is likely to be harder to marginally improve as it approaches the Fed's target. If you toy with the idea that continued strong labor markets + continued consumer spending = no blow-out recession, where is the deflationary shock?

There is also something to be said about how US consumer psychology may have changed in recent years. We saw an immense net of government support for US consumers and furthermore US risk assets during the most significant tail risk of recent memory, covid. Winners were minted by the full faith of the US government through many different programs and their direct or eventual effect on US equities and the most commonly owned assets (like homes.) If the majority of US consumers are liquid enough to survive, well aware of what a long-term SP500 chart looks like, presumably covered by safety nets, and with residual injected capital.. wouldn't they be buyers of risk, goods, and services? There are other psychological aspects of covid that may or may not have legs, like the concept of "revenge spending" and the fresh memory that there was a recent time they were flush with cash, jobs (and still are), and allowed to go nowhere and experience next to nothing.

Last thing I want to highlight are the roles of duration in the "soft landing" case for risk assets in the form of:

  1. daily volatility eating away at the incremental misallocated dollar;
  2. the slow and constant drip of transaction costs;
  3. underlying growth, accruing a day at a time and stepping closer to US equity expectations;
  4. normalization of higher prices in real expectations;
  5. allowance for the realization of productivity gains;
  6. continued changes related to market participants, outlined in the post above and the paragraph prior to this.


I'm not exactly sure where this leaves us. When I think about outcomes, they are very dependent on specifics, subject to knee-jerk market gyrations, and price always matters. My bearish case is feeling more played out by the day while the marginal changes are bolstering the case for a soft landing... but in the face of further inflation, the Fed has more runway to raise rates. Inflationary assets seem more attractive in the short-term and outside of that, the ball is back in the Fed's court.

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