Taxes and Accounting

06/09/2017 12:12 PM
The Trump Trade is Dead...all hail the Xi Trade

With all of the fuss around yesterday’s Comey testimony, I thought it would be a good time to have a look at the “Trump trades” from the beginning of the year. The charts will show that, as in the pic above, despite continued bluster and gesticulating, the “Trump Trade” has given way to the “Xi Trade”.

After the election, the big one was “Trumpflation.” The idea was that Trump is going to spend a ton of money on infrastructure and defense, leading to more bond supply, higher deficits, higher term premiums and higher inflation.  This lead to an acceleration in global growth expectations, pushing inflation expectations higher around the world.

Since November, 5y5y US breakevens have been trending lower consistently. EUR 5y5y breaks took longer to reach recent highs and have been more reluctant to retrace given a better run of economic data. US breaks have retraced the whole move higher since the election, while EUR breaks are still about 10bps off those levels.

Real yields have a case of the “suppo-sta’s”. They were suppos-sta go higher.

Nominal yields have bull flattened, indicating a quick end to the Fed’s tightening cycle--not exactly a vote of confidence in Trump’s ability to increase growth rates in the US.

Not much to pick from between 10y UST (blue) and the 10y UST/Bund spread (orange).

We were also told USD would stay strong since Trump had finally solved the growth riddle, simply by promising to spend a ton of money to spur domestic demand and business investment.  EUR and JPY depreciated hand-in-hand, but JPY has gone sideways while EUR has been ripping. Jens Nordvig, head of Exante Data and former Nomura FX guru, believes there has been a fundamental turn in capital flows back towards Europe. This ties out to my intuition--in 2016 capital fled Europe due to QE and low growth expectations. Now growth has picked up (a little bit, anyway), and the Trump demand resurgence has been exposed as a lot of hot air. The German export powerhouse flexes its muscle again.

The most famous blast zone of Trump risk was usd/mxn and Mex rates. The peso fell 6% on the day after the election, and after coming back modestly into year end, melted down completely shortly after New Year’s when Trump unleashed a Twitter bomb suggesting he would implement a “border tax” on Mexican auto imports and withdraw from NAFTA. MXN moved opposite of EMFX at large, which was recovering nicely.

MXN (red) vs. EMFX (purple, inverted so it moves the same direction as MXN)

This is a chart of the residuals of usd/mxn vs. the EMFX Index--higher figures indicate MXN is cheap relative to the regression. This shows how MXN has not only closed the gap from November outright but also unwound all of the underperformance relative to the rest of EM complex.

Similarly, TIIE got demolished by Banxico aggressively hiking rates to defend the peso or financial stability, the locals' paranoia about Trump, and corporates with USD liabilities crushing offers in the cross-currency market, leaving banks as huge payers into a market with no bid.  
In late February, Banxico implemented measures to backstop the peso and stabilize rates. Those measures combined with very attractive real and nominal forward rates convinced foreigners to buy duration, and local pension funds chased yields lower after moving aggressively into short duration and linkers in a futile attempt to shield themselves from the selloff in rates. These accounts extended duration as Banxico continued to hike and global curves flattened. 2x10 TIIE officially at zero….Bottom line: the herd turned.

Next was stocks. “Risk on!” Came the cry from equity desks around the world. More spending! Lower corporate taxes! Offshore corporate profits repatriation! Business confidence! Deregulation! Financials and oil/gas stocks led the way, thankful that one of their own was finally back in the White House.  

Since the beginning of the year financials (XLF) have chopped around while oil/gas stocks (XOI) have gotten hammered by the combo of a slothful, inept Trump administration and lower oil prices.

Similarly, small cap stocks stood strong after the election--Trump was going to cut taxes, regulate, cancel Obamacare, etc. etc. Sorry, Charlie.

Alright, but the S&P had a great run after the election--why hasn’t it given back any of its gains? The sectors that underperformed in November and December have reversed course--Health Care (XLV), and here’s the big one--technology (XCI). The 20% gain in tech has plugged the hole in the index left by the sectors that led the big move higher late last year. Thank you, Mr. Beta.  

And lastly from the equity world, there was Trump’s mantra borrowed from populist windbags the world around, “Putting America First.” A funny thing happened on the way to autarky--an avalanche of money flowed into emerging market equities.
Why the reversal? Copper prices rocketed higher after the election because Trump was going to build more stuff. Here’s one that has held up, but credit goes not to Trump but to the resurgence in EM growth and Chinese demand--the Xi Trade.

Copper (HG1)

Lastly, there is credit. IG spreads were already recovering after the brutal start to 2016 and the shock from Brexit. They never really took much of a breather, just continued to grind tighter and tighter.

Vol played a significant role in this as well--was the utter destruction of vol one of his campaign promises?  IG implied vol has clattered through the lows. Like tech stocks leading the S&P higher, this is credit traders juicing coupons and eating their seed corn.

By contrast S&P vol is certainly historically low but hasn’t seen the steep decline of bond and credit vol.

Where does that leave us? I try to avoid crystal ball stuff but here’s how I see it:
  • Trump and the US political scene at large: I think he’s done politically--and taken together, the market agrees. Trump is going to be fighting with Congress, Comey and Muller until the GOP majorities get liquidated in the mid-terms. After that his agenda is over, and Democrats will be circling like sharks around a wounded tuna.
  • Nominal rates and breaks have priced fiscal stimulus at zero, which close to the right price given the way Trump has frittered away his modest political capital.  But the flattening of the curve and unwinding of hikes by the FOMC beyond this year shows markets are somewhat complacent about inflation picking up on its own accord. That being said, don’t hold your breath.  
  • EUR can continue to benefit from a sea change in capital flows after several years of outflows.
  • Mexico: We come here today to bury the “NAFTA withdrawal” trade. Again, if Trump could have put together a coalition of domestic manufactuers, unions, and xenophobes to rip up the treaty, he missed his chance. The TIIE curve will invert as growth stagnates and the inflation spike fades, but Banxico will be loathe to cut rates too quickly ahead of the 2018 election. Election risk will become salient around the end of the year when polls should start to become more reliable as it becomes clear who PRI and PAN will run against AMLO, but Trump’s ham-handed political circus will take some of the air out of AMLO’s campaign.
  • Stocks--Can’t stop the Feeling! Just dance, dance, dance…. Seriously, corporate profits will have to “show me the money” to keep this train rolling, but that hasn’t stopped the market before. This probably would have gotten me fired as an equity manager but I believe value is indicative of future returns--and I can’t see how this chart and current demographic and geopolitical trends end in a reasonable return on risk capital, unless 1929, 1966, and 2000 were really good times to buy stocks.

  • IG, HG, vol--see above.   Taken together, real money is getting squeezed and is increasing risk by buying tech, high yield, selling vol etc. to keep the ball rolling. The longer it goes on, the smaller the exit door gets.
  • EUR, DXY, EM--the prior two bullets notwithstanding, I think the flows can keep going--I prefer EM rates over EMFX--but I’ll want the hedges I discussed in Wednesday’s post in my back pocket. The resilient copper chart illustrates global demand is still stronger than it was last year. This is the new paradigm for 2017….the Xi Trade.

06/08/2017 11:16 PM
Consensus Thinking II

"Alas, the chance of a robust opposition emerging from this miserable election campaign is vanishingly slim."

-"Labour is unfit even to lose", Bagehot, The Economist, May 20, 2017

Your investing brain lusts to buy into this kind of stuff. Full marks for the illustration, though.

06/08/2017 10:24 PM
Consensus Thinking, Defined
"The pound rose on expectations that the prime minister would win a much increased Commons majority, allowing her to sideline implacable Eurosceptics in her Conservative party and ensure a phased Brexit concluding with a UK-EU free-trade deal."

--FT, April 18, 2017

"The pound is down sharply as traders react to the early election results. The currency market had been expecting a clear victory for Theresa May's party, but the results so far, and the exit poll, have cast doubt on a Conservative majority."

--BBC, June 9, 2017
06/07/2017 10:11 AM
China Risk, Credit Booms, and Hedges--what's a PM to do?

If you’re of a certain age, you remember what you were doing on election night in 2000. Al Gore was declared the winner around 11pm, or was it Bush? It was too close to call.   Back before we did everything on touch screens, NBC anchor Tim Russert kept a whiteboard of the states that were still up for grabs. By midnight, it was clear Florida was the one state that would put either candidate over the top. Russert famously erased all the other states on his board, and wrote, “Florida, Florida, Florida.”

If I were on tv talking about emerging markets, it wouldn’t be too much of an exaggeration to write “China, China, China” on my EM white board. As I mentioned in my post on Monday, the resurgence in production, growth and stability in China over the last year has led a to a very supportive environment for emerging markets assets after a dreadful couple of years. While there are danger signs, the ball could keep rolling for quite a while. How can we assess the risks in China, and build a resilient portfolio accordingly that is robust to the possibility of a hard landing?  

I won’t go over all this ground again….you know the drill: China manages the economy and financial markets to maximize the political stability of the regime. China devours commodities like a stray dog set loose on a Vegas buffet. China has capital controls to prevent money from fleeing too quickly. Chinese investors are inflating a property bubble for lack of alternative investments destinations. China has an ever expanding credit stock that the authorities struggle to manage so it simultaneously keeps growth humming while not imperiling the country’s financial stability.

How are they doing on that last one? Our friends at the New York Fed have looked at the data, and determined, you’ll never believe this--China is experiencing a credit boom.

The IMF defines an expansion in credit in an economy as a “credit boom” when one of two criteria are met: 1)  the deviation of the annual growth rate of credit/gdp exceeds 1.5x of the trend standard deviation over the past ten years, and the credit/gdp ratio exceeds 10%, or 2) the annual growth rate of the credit/gdp ratio exceeds 20 percent. Without spending too much time abusing the data, China has been in a credit boom since 2012.

Similarly, the Bank of International Settlements has studied a number of different metrics for “early warning indicators” of a banking crisis. Their data suggests there are two indicators that consistently outperform other measures as “EWIs”. The credit/gdp “gap”, which is the gap between how fast credit is growing relative to a five year trend, and the country’s debt service ratio. The DSR is a measure of what percentage of income is devoted to debt service, or repayment of principal and interest. The higher this ratio goes, the less income there is leftover to spend on, well, anything else.  

The credit/gdp “gap” moved into the danger zone back in 2012 and has kept on truckin’ ever since.
As one would expect from an economy with a rapidly growing credit/gdp ratio, the DSR has been on a tear since the post-GFC stimulus measures of 2009--and on an absolute basis, reaching a point where countries have hit the wall in the past.

Also, the BIS notes below that there are a couple of “red lights” for China in their “EWI” analysis--in this measure, DSR is expressed as a deviation from the five-year mean, which illustrates how quickly the ratio has been accelerating. Both the BIS and IMF have noted the more quickly a credit boom expands, the higher probability of an ugly ending.

When you add in some aspects of the shadow banking system and credit growth including “nationalized” bank debt taken on by local governments, one can argue the credit “boom” is even larger than the narrow, relatively conservative definitions in the BIS and IMF data.

China’s Continuing Credit Boom

Alright you say--we’ve heard it all before...nothing to see here, please move along...But what is the probability of an ugly ending? The IMF’s study of the history of credit booms determined there are often two consequences of a credit boom: 1) a financial crisis, and 2) economic underperformance, defined by six years of growth 2% or more below trend, or both.

In 69% of cases, one or the other, or both occurred at the end of the credit boom. The paper suggests the other 31% were cases where there were significant financial and structural reforms that caused an increase in productivity, or credit was coming from such a low and underdeveloped level that the credit boom caused the economy to catch up to “normal” levels of credit. China continues to kick the can down the road on structural reforms, and pre-boom credit/gdp ratios were already above 100%, so there is little to suggest the economy is simply developing a healthy credit market.

Whew...ok, lots of numbers there. Given China’s role in global credit expansion and commodity demand, it is clear how and why China is so important to emerging markets, and probably a systemic risk. In the past three years we’ve also seen the delta of Chinese demand to EM financial stability and growth. But the credit data shows nothing much has changed!! The stress, vol, capital outflows and FX deval of 2014-2016 could be better defined as a breather more than any significant deleveraging.

So as a portfolio manager, how do you deal with China risk? Here, I’ll borrow from the esteemed market strategist/philosopher Dylan Grice:

“One problem is that many of the big moves we’re supposed to ‘trade around’ are fundamentally unpredictable “Taleb’s Black Swans), and no amount of research will predict such events. Perhaps a more important thought is that we’re simply not hardwired to see and act upon the big moves that are predictable (Taleb’s Grey Swans).”

The data suggests there is a significant chance, maybe as high as 7 in 10, that China will experience a significant decrease in growth, a financial crisis, or both, in the next five years. Given Dylan’s point above, and well known behavioral biases, do you think that these risks are baked into vol markets that are at historical lows? Me either. But even if it is, it is certainly a “grey” swan and not a black one. The good news is by buying some vol, we’ll pick up protection against completely unpredictable events along the way.  Let’s cast the net for some hedges.  

Again, with apologies to Mr. Grice, here’s what I think is true about China.
-Chinese credit is expanding fast, and historical data suggests it is prone to disaster
- there’s too much debt there, and probably everywhere else too
-Central banks are likely to react to any credit stress in China with the same elixir: more credit.

And here is what I know is true about China:
-There is plenty of uncertainty--There are smart people that think China has the resources to recapitalize the banking system and/or high enough domestic savings to weather a credit storm.
-a financial crisis or significant decrease in current and future growth expectations would cause a spike in volatility in emerging markets.
-We have no idea when.

Given these constraints, and our hypothesis that the market is underpricing long-term risk of a China driven calamity, we want to use volatility to build in some EM and commodity sensitive hedges which will 1) give some gamma and upside to capital flight or a metastasizing crisis should property and/or credit markets turn ugly quickly, and 2) give us more staying power in long-side trades we’ll need to make our PnL budget if we waiting for Godot (finally, that intro to drama class I took freshman year pays off).  

We’ll get into the long-side carry trades another day. Here are a few ideas for hedges in what is by no means an exclusive list.

It is no secret Australia has huge exposure to Chinese demand. The price of this ATM 5y5y AUD receiver swaption is about 48bps per year. The black line below shows just how far through previous lows Aussie swaption vol has fallen. The red line represents the 5y5y rate, which is nearly 100bps off the lows from last year.

CAD receiver swaptions would likely offer good value as well for the same reasons.

The flattening of the USD curve this year has unwound virtually all hikes by the Fed beyond this year. In a Chinese hard landing the curve could invert as the market prices a return to ZIRP. The price of this 3y- 1y USD receiver swaption would be around 12 bps per year for three years. The chart shows US rate vol isn’t quite as cheap as some other hedges but it is a liquid and straightforward way to gain exposure to a reversal in the Fed’s tightening cycle.

In the FX world, we can grab some low delta put options on China-exposed currencies. We’ll use AUD and CAD again, and add in SGD, which has very low rates and trades like a basket of Asian currencies dependent on Chinese demand.

This chart represents the implied vols for a portfolio of 2 year, 10 delta USD call options on AUD, CAD, and SGD. The implied vols we see here are through the levels from just before the taper tantrum, and very close to the levels from just before commodity prices in general, and oil prices in particular, started to fall in mid-2014. These currencies will all get pummeled if China rolls over.

Similarly, 2-year, 25 delta risk reversals have reached some very complacent levels. CAD is scraping along the lows, as is SGD, while AUD is blowing right through. These trades would give you cheap gamma to trade around when and if vol accelerates.

Outright shorts in CLP and COP will give us some reasonably priced exposure to two commodity intensive currencies, with very easy to swallow annual carry of around 3% and 5% respectively. Colombia in particular has structural problems, low real rates, a persistent current account deficit and vulnerability to lower oil prices. Despite this, the currency that has rallied 14% from the 2016 lows. Chile practically begs a macro trader to short its currency given its high dependence on copper prices, significant USD-liabilities in the corporate sector and highly leveraged consumers. Chile also has near zero real yields that will dive to negative territory in a China hard landing.  
In addition to the SGD puts and gamma noted above, outright short SGD has some merit as well, given its low carry, linkages to global trade and the banking/finance sector.

For the FX option trades we can simply size the premiums to generate negative carry that we are comfortable with relative to overall risk, our PnL budget, or expected positive carry and rolldown, whatever metric works the best. The outright shorts are a little more complicated since our objective here is to hedge tail risk and build long-term staying power for a broader portfolio. But these long USD positions are attractive on a micro level and will also add some protection against an increase in inflation and a bear steepening of global rate curves.

Putting it all together--we can pick and choose a few of these hedges that are currently on offer at fire sale prices and size our hedge portfolio in such a way that we have significant positive gamma should the bloom come off the EM story’s rose. We don’t know the future--but we can prepare for it. These hedges will manage some of the uncertainty surrounding China and give us the latitude to seek out smart long side trades while preparing for the worst.

06/05/2017 12:34 PM
A Random Walk Through Emerging Markets
Image result for emerging markets pictures

Welcome to the first edition of MM’s “EM Corner.”  TMM certainly swam in EM waters from time to time, and we approach markets from the same perspective: global trends have a trickle down effect that impacts assets throughout the world. While I focus on EM assets, it is paramount that I have a firm grasp on global macro. If you’re looking for the latest technical analysis on EEM, sorry, you’ll have to go somewhere else.

One of the great metaphors of financial markets was coined by the Venezuelan economist Ricardo Hausmann: the “original sin” of emerging markets. Before there were developed EM bond markets, all EM governments relied on bank loans from US and European banks. These loans were made largely in dollars, but the revenues of the country are in the local currency. As the local currency depreciated, the dollar liabilities became more expensive to pay back, leading to a vicious spiral. This is what drove the boom-bust cycle of EM, usually ending in default, revolution, or ex-Citibank bankers absconding from Manhattan under cover of darkness.   

That boom-bust cycle still exists, but market developments have changed the dynamics.  One trend I have been droning on about for years is emerging market governments’ move away from dollar-denominated debt towards locally-denominated debt, which puts more pressure on FX as the relief valve or adjustment mechanism. More about that later in the week.

How much of EM is in the tradable macro universe?

There are three big asset classes in what we’ll call “EM Macro”: 1) Equities, via some ETF like EEM, or ETFs based on country-specific sub-indices, 2) FX, which is going to be done via spot or forward trades in currencies like MXN, BRL, TRY, ZAR or CNY, and 3) Fixed income, which has a smorgasbord of potential goldmines or widowmakers: dollar bonds, local currency bonds and swaps.

I largely stick to FX and fixed income. People like to talk about FX, because there’s a number you can get your hands around. You can build a fundamental case for the currency of your choice. There are few markets out there that lend themselves better to charting and technical analysis. And in most emerging market countries, there is a history of huge devaluations of the local currency seared into the collective memory. Most locals will have some idea, maybe even a very exact one, of how much their local savings is worth in dollar terms, unless of course, they are saving in dollars already because they became conditioned to their government treating the currency like a piñata.  Everybody has skin in the game, and everyone has an opinion.  You can recognize the watercooler talk.

“Where did you buy usd/zar?”
“I got short at 12.50, riding the wave. Commodities are strong and the Fed’s on hold, man.”

“What do you think of usd/brl here?”
“I’d love to be long but the carry is a killer.”

“Has anyone seen Bill? Haven’t seen him in a couple of weeks.”
“He’s gone. usd/mxn.”

Combine that easy access with big moves and huge flows, and you can see why a traders love a good FX story.   

I generally see better opportunities in fixed income. The correlation between FX, inflation and local interest rates cannot be overstated. Trading EM rates is like getting the whole enchilada rather than just the rice and beans. Gauging inflation is key--many EM central banks explicitly target inflation for monetary policy decisions, and bondholders face inflation with all the courage of a bunch of chickens dropped into a dog pound. There’s also credit: some countries borrow cheaply, like Germany, and some borrow at usurious rates from Goldman Sachs, with grave human consequences, like Venezuela. And countries have options about where and how they issue. There are vast pools of buyers from real money, hedge funds, SWFs, local pension funds, local mutual funds and central banks. So understanding supply and demand is vital.  

In the past several years, EM has generated some big macro opportunities. There was the Chinese-reflation story of 2010-2012, when Beijing decided to throw open the credit channel to keep the factories humming. This drove demand for EM-intensive raw materials, and in combination with the Fed’s QE printing press running full steam, it was all systems go for EM.  Huge inflows cascaded into EM and caused many currencies to re-appreciate to or beyond pre-crisis levels.

Later, there was the great unwind and outflows of 2014-2016. The combination of slowing Chinese industrial demand and increasing inventories crushed commodity prices. That, combined with the Fed finally starting to hike rates in late 2015, spurred a huge rally in the dollar. As we have seen so many times in so many markets, locals, hedge funds and real money fled EM like their hair was on fire. Big depreciations in local currencies drove a spike in inflation, and falling growth rates hammered fiscal accounts. This combo platter caused a dramatic increase in real and nominal interest rates.

In early/mid-2016, there was a huge buying opportunity in EM as valuations hit rock bottom, commodity prices bounced off the lows and many countries made progress in plugging holes in their current accounts and/or fiscal balances.  So you can see how just in the past five years there have been a few chances to make a ton of money in EM, just by considering the macro implications of what is going on in the world, especially in China and G3 monetary policy.

The current market is quite supportive of EM. Global demand has picked up. Commodities have stabilized, and the dollar is chopping around, with the potential to weaken if we get more lousy data like we did on Friday. Historically low levels of vol in risky assets is pushing foreigners into EM carry trades, a trend that usually tends to go on longer than most people think, even if it will again end in a stampede for a tiny exit door. I don’t see a catalyst for this to change in the short term, and given the still low DM yields and structural improvements in some significant EM economies, there is room to run in EM at large.

Stay tuned to MM later this week for a discussion of the political fireworks and reform agenda in Brazil. 

06/02/2017 08:04 AM
Redux Friday
There comes many a time in a Macro Boy's life where there is not much to do and no new ideas come immediately to mind. 

During these times, one can trade tactically or just sit back and keep hoping that core positions keep working. So Let's take this Friday to review some core positions.

Short CAD:
  • The short CAD trade got a bit too crowded. 
    • Crowded positioning doesn't automatically mean there will be a move in the opposite direction. But it does mean we are in for some chop even if we are right.
    • We saw some unwind during the week. I took the opportunity and actually put on the bulk of my position two days ago. I will be curious to see where the upcoming CFTC positioning show at the end of the week.
    • I keep wondering if CAD is the best way to express this housing bubble trade - I don't know...We shall see.
  • Canada (British Columbia) has elected to move very far left politically Read It Here
    • What does this mean? Well for starters, spoiler alert to what the world would be like if Bernie Sanders or Elizabeth Warren gets elected in this country. *shudder*
    • How does the political far left feel about housing bubbles? Clue: like a teenager with an itchy zit. Read It Here
    • This should be interesting. We might come back and discuss this on a later date.

Crude Realities (Short Crude):
  • Crude was chopping around when I last wrote about it. But any chartist would see that it was making lower highs and lower lows.
  • We had the OPEC meeting where they officially announced an extension of production cuts. Markets got slammed by 5%. Oops.
    • I put on a sizable oil short during that session
    • Market share, market share, market share...
    • I wrote it before and I will write it again. OPEC, who by the way is infamous for internal cheating, cannot sustain cuts (at least that's my bet) because of market share.
  • Then, Libya production was the news du jour - crude proceeds to sell off
  • Then, huge crude inventory draw - crude first gets bid but ends the session lower 
    • When price and headlines diverge, it's the market Gods' way of telling you that something greater is at work
    • This is where I should be stepping on the gas, but my position is already big enough.

  • Just for kicks and giggles, there's a demand side of the story too for crude. Has anyone seen these auto sale numbers (last printed a couple of days ago)? And this is before I massage the data to adjust for vehicle fuel efficiency. 

Carney The Cable Guy (Long GBP/Short Sterling Steepener):
  • Bottom caught that one and it has worked out well. 
  • The last couple of days GBP has slipped on election worries, as the market thinks Theresa May's party will be winning less of a majority than previously anticipated.
    • To me, that's all noise. If you're feeling a little bloated from this position, cap some profits. If not, probably better not to mess with it. 
    • If GBP falls, I see that as a buying opportunity. (Unless something unfathomable happens, election or otherwise)

Food For Thought (Long Wheat/Soybean Ratio, Long Grains):
  • Direction bet has not done well. Brazil's currency shock from a few days back really hurt the beans market. 
    • Weaker currency allows them to export more. 
    • Political uncertain somehow is also incentivizing farmers to sell more? (not sure if that makes sense, but definitely remember reading that somewhere...)
  • Looking at stockpiles/production/etc. for beans - although it's already extended, we can still easily go higher (there is even historical precedent)
  • Overall, grains going nowhere - maybe even slightly lower
  • I'm still a believer in the big move in grains (especially in corn and wheat). But the timing was definitely wrong. Maybe next year's crop.
  • The spread has worked. I am a believer here, but a bit concerned about the cost of blindly rolling. But in the meanwhile, there are probably a few hundred more bps that can be squeezed out of this position.

Long US Duration (Long End):
    • Thank you, Mr. Leftback
    • I was originally a major proponent of the reflation mega-theme (something that I used to think (and maybe still do) that we were at a starting point and would transpire over the next 20 years)
    • Covered my UST short back in mid-March. 
      • Was too shocked to go long. 
      • Went long duration in early May and then covered 3 weeks later
      • Put on another long position a couple of days ago
    • Chart-wise, it looks really good to be on the long side. Regardless of the upcoming jobs number.
    • A hike in June is all but a done deal, yet long end keeps getting a bid? Hmmm.
    • 2s10s keeps flattening - if the Fed stays pedal to the metal on the short end, are we going to go inverted? I think very possibly.
      • I think 2s10s flattener and 2s5s vs 10s30s box can both be chased here. Something I'm keeping an eye on.
    • US BEI curve is also flattening - another thing that I'm keeping an eye on, waiting to see if this thing goes inverted again.

    Long Equities (Long Turkey, EM, Europe, Some US Equities):
    • Small positions for me, so kind of a yawner
    • China is rolling. Both equity index and currency. The currency move was interesting - noted by our very own Macro Man, it was a record move since the RMB reference basket mechanism was introduced in 2015.
      • Macro Man says he needs more data. Personally, I smell policy move.
    • Turkey continues to be rolling as well. 
      • Think Brazil in beginning of 2016 and Argentina in the beginning of 2013. 
      • The market is often early to discount. Buy when there is blood in the streets.
    • Brazil is really interesting to me - I have strong feelings about meaningful reform taking place - I think this is could be a tantalizing chance for you to go long BRL and Bovespa - No dire rush yet, will do more work on it and discuss this in the future.
    • Merkel talking up the Euro economy, while everyone is underweight Europe
      • Same concept as going long EM. This will probably be a big long-term theme. Need to get more long.
    • The underperformance in the US has not materialized much against EM but should occur in the second half of this year. The US has started to underperform Europe.
    • Underweight the US, but still long some stocks out of general obligation.
      • Really liked the price action yesterday in Russell - seems like it's going to break out a long-term consolidation
      • Another market/chart truism: The market doesn't give you this much time to sell the top. We've been floating around for awhile, we are probably going higher. 
    Wow. That took longer to write than I thought.

    Well, TGIF guys. Good luck with the jobs and trade numbers. 

          05/30/2017 11:30 AM
          Satisficing vs Maximizing
          "Maximizing" means expending time and effort to ensure you've solved something as best as possible. It typically needs lots of exploration and analysis to ensure "the best" option hasn't been overlooked, and that we have confidence in our evaluation of all options. "Satisficing" means picking the first option that satisfies some given criteria. It's less time exploring & analyzing, more time acting. It's not getting paralyzed by the pursuit of "perfect," but it often doesn't result in finding the very best. In software and startups we can choose when we maximize, and when we satisfice. It might seem like maximizing is best especially when you have teams of smart people who can do the maximizing. But not necessarily.
          05/16/2017 10:30 AM
          Not sure?
          Whenever you’re dithering, usually the correct answer is the difficult one. The reason you’re dithering isn’t that you’re unsure. It’s that you don’t like the truth, so your emotions are trying to justify the easier path. But your job is to do the difficult thing.
          04/25/2017 10:30 AM
          Avoiding the trap of low-knowledge, high-confidence theories
          There’s an underlying mechanism that causes us to be falsely confident in our command of knowledge and decision-making. We automatically construct narratives of comprehension, even when our command of the facts is feeble. Defeating this requires intentional effort.
          04/11/2017 10:45 AM
          The wrong question: Is now the right time to start a company?
          The answer to that question is "yes," but that's why it's the wrong question.
          03/21/2017 10:45 AM
          Why large companies acquire small companies
          Large companies don't acquire small companies for their financials, because small company revenues won't mathematically affect the growth or value of the acquirer. Rather, small companies are acquired for strategic reasons, and understanding how that works is the key to understanding how small companies are sold.
          01/02/2017 11:00 AM
          Look what we did
          "You must be so proud of what you created" — the reflexive conclusion delivered by visitors to our building at WP Engine, struck by a beautiful place teeming with energy and activity, coming upon the little office of the founder. "What we created," I always respond. It's not false humility. I didn't create this. There are over four hundred people creating it even as we speak. I haven't even been the CEO for three and a half years.
          12/20/2016 10:00 AM
          Building in public forces true competitive advantage
          If you write your code in a public github repo, others will judge your code, with a broad definition of "quality" that includes everything from file and class organization, documentation, tests, avoiding placing API keys in code, eliminating your reliance on "security by obscurity," and even that artful quality which like the proverbial US Supreme Court definition of pornography is impossible to define but "you know it when you see it." In this sense, building in public forces you to create quality, artful code. The force at work is as simple as it is universal: Ego — your desire to impress others. Can you redirect the same force to create even more valuable outcomes?
          12/14/2016 10:30 AM
          Laws of 10x found everywhere. For good reason?
          We all see patterns, even when there's only noise. And we like a good story. If the story makes sense, and the pattern isn't complete nonsense, we see the story as truth, and the pattern as verified. Maybe that's the case with the idea that things in startups come in 10x increments. But I think it's actually true, or true enough that it's an excellent rule of thumb that should be assumed until proven false. Here's a bunch of examples to guide you.
          12/06/2016 11:30 AM
          Worrying is self-fulfilling; what to do instead
          "Worry" causes the very thing you're worried about, to actually happen. "Worry" breaks everything, even things which aren't broken. It doesn't lead constructively to solutions, it just creates problems. The opposite of "Worry" isn't "Apathy." The opposite is "Planning" and "Preparation."
          11/25/2016 11:00 AM
          How to simplify complex decisions by cleaving the facts
          Businesses of all sizes face complex decisions for which there is no one, correct answer, and yet a strong and often permanent decision has to be made. Sometimes this is due to fundamental uncertainty inherent in the decision, e.g. not knowing how the market will evolve, what competitors are secretly investing in, whether new marketing campaigns will be successful, or how an important new hire will perform. But I've seen little startups, mid-sized companies like WP Engine, and large companies struggle to deal with complexity in decisions even in conditions of little uncertainty, but in conditions of high complexity, and this is something we can improve.
          06/10/2017 05:07 AM
          The Whistleblower Behind Caterpillar Tax Commotion

          "I wrote before on the execution of a search warrant on Catepillar' Headquarters.  Search Warrant Executed Against Caterpillar HQ, Apparently Related to Tax (Federal Tax Crimes Blog 3/6/17; 3/8/17), here.  I concluded that discussion with the following speculation:

          I will raise one possibility, though, and I caution that this is entirely speculation.  I wonder whether her report could have been submitted along with a whistleblower claim?  I have no idea, but given the numbers involved, a whistleblower claim is likely to be very lucrative indeed.  But, I certainly have no idea whether that is the case.
          Bloomberg reports that a whistleblower claim is behind the Caterpillar commotion.  Bryan Gurley, David Voraceos and Joe Deaux, The Whistleblower Behind Caterpillar's Massive Tax Headache Could Make $600 Million (BloombergBusinessweek 6/1/17), here.

          The article identifies the whistleblower as Daniel Schlicksup, a Caterpillar accountant, and summarizes his saga from company curmudgeon trying to get the attention of superiors on the matter to finally whistleblower.  A very good read.

          Schlicksup's journey is consistent with my experience with whistleblowers or persons considering becoming whistleblowers.  All too often the company is just not interested in listening before the problems get out of hand.  The wizards in the company buttressed by their outside professional enablers will not listen to naysayers, and often the internal mechanisms to elevate problems can be thwarted by power structures in the firm.  That is not the way it is supposed to work, particularly for public companies, but unfortunately that is the way it sometimes works.

          Now, for a brief review of the tax whistleblower possibilities.  Section 7623(b), here, allows whistleblower awards of from 15% to 30% of collected proceeds from the whistleblower information.  In this case, the collected proceeds would include the tax, the interest on the tax, any penalty (either 20% or 40% accuracy related penalty under § 6662, here, or the 75% civil fraud penalty under § 6663) and interest on the penalty, here).  The article says that the underlying tax bill may be $2 billion and apparently derives a $600 million potential reward based on the maximum award of 30% of that amount.  Of course, the amount of the reward between 15% and 30% is discretionary (although subject to review by the Tax Court), but my experience suggests that an award in this case would probably be at least 22.5% (splitting the difference for a rough and ready solution).  And, of course, if the $2 billion amount does not include interest or penalties, then the reward base would be increased.  In any event, assuming the same $2 billion base, even a 15% reward of $300 million would be sweet.

          For more discussion of the whistleblower reward program, see Michael Saltzman and Leslie Book, IRS Practice and Procedure, ¶ 12.05[4][a][iv] Informants (including whistleblowers seeking rewards) (Thomsen Reuters 2015) (online edition).  (Note, I am the principal author of that Chapter of the Saltzman and Book text)."
          Originally Posted By -