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Joseph Stuber

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  • How The Fed Has Exported Inflation And What Happens To Risk Assets When The Money Flows Reverse [View article]
    Andysud

    I think you are wrong on your interpretation. From Aug 2002 through June 2012 both the S&P and TLT were up 55% - an almost perfect postive correlation over a 10 year period. From April 2013 to today stocks are up 22% and bonds down 10% - close to perfect negative correlation over the course of 1 year.

    JS
    Apr 4 11:05 AM | 1 Like Like |Link to Comment
  • How The Fed Has Exported Inflation And What Happens To Risk Assets When The Money Flows Reverse [View article]
    Christopher

    The stock market's current valuation is supported by the yield curve which requires high bond prices so I can't really argue that point.

    I also agree that you can't be bullish on stocks and bearish on bonds at the present time and I am not bullish on stocks.

    Your point that bond yields are the discount rate for equity cash flows implies that when stock earnings fall to a certain level one would be well advised to rotate into bonds and therefore the bond market - to some degree - sets the price for equities in the aggregate. No problem with that either.

    Where I think we might disagree though is the idea that were we to cross over that point where stock PE's were so high that the earnings relative to bonds would cause money to flow out of stocks and into bonds and therefore the two markets are always inversely correlated. I think that is what you are saying and if so, I disagree.

    Both bonds and stocks have been positively correlated for a number of years now. And that positive correlation can continue on the bear side as well.

    Part of the reason that is true is that the stock market is supported by credit - as in carry trades - and that means when stocks are sold the money goes to pay off the money fund debts and therefore that money just disappears - it doesn't rotate into bonds.

    Coincidentally the Fed is providing a place for those money funds to park there money when the carry trade unwind begins as they are becoming very aggressive competitors for those funds with their reverse repo operations.

    JS
    Apr 4 12:04 AM | 1 Like Like |Link to Comment
  • How The Fed Has Exported Inflation And What Happens To Risk Assets When The Money Flows Reverse [View article]
    Christopher

    I don't know how to respond to you when you say that China is supporting the dollar as that is clearly not supported by facts. China has entered into a number of bilateral trade agreements with at least 23 countries and those trade pacts don't involve the dollar. That is supported by the fact that the yuan has overtaken the euro. Those actions don't support the dollar and in fact put significant downside pressure on the dollar.

    China also sold roughly 8% of their treasury holdings last year and that is not supporting the dollar. To the contrary, that is a direct attack on the dollar and done so deliberately.

    You start with a false premise, wholly unsupported by fact, and then suggest that they are doing us harm by supporting the dollar and suggesting that we want the dollar to be weaker.

    If we wanted a weak dollar we would not be tapering QE and we would not be engaging in $5 trillion in reverse repos. A weak dollar is the last thing we want at this point and all the facts suggest that is true. The Fed is fighting with all they have to keep the dollar propped.

    JS
    Apr 3 11:48 PM | 3 Likes Like |Link to Comment
  • How The Fed Has Exported Inflation And What Happens To Risk Assets When The Money Flows Reverse [View article]
    Andysud

    I do think the bond and stock market could fall in unison and in fact expect that. I think positioning in bonds at any maturity is ill advised but do think the 10 year gains on the 30 year. In other words, I think the whole yield curve will flatten.

    JS
    Apr 3 09:31 PM | Likes Like |Link to Comment
  • How The Fed Has Exported Inflation And What Happens To Risk Assets When The Money Flows Reverse [View article]
    Andysud

    Who can play the carry trade. International banks, primary dealers and others who have access to money market funding. And those who have UK subsidiaries as the rehypothecation rules in the UK don't limit the amount of leverage one can employee relative to a pledged asset.

    The second question is a little hard to answer. If things move in the direction I think they will then we should - over time - see the yield curve flatten meaning short term rates climb much higher but that also implies the long term rates will not move that much higher in relative terms.

    Third question - depends on your timing. I think those parts of the oil industry that benefit from higher crude prices could do particularly well as inflation heats up. Once the dust settles home builders will probably do well in an inflationary situation. Regional banks as well as lending will be both safer and more profitable - but that again is after the dust settles.

    Timing is a little more difficult to determine though and in my opinion depends on how hard the BRICS press the matter. In my view they have all the bullets but if they get to aggressive in using them the results could be catastrophic in the short term. I guess that is the wild card and the Fed should be able to support the dollar and keep the yield curve in tact for quite awhile unless they push back real hard. That is why I think the upcoming G20 meeting may provide us with some answers.

    JS
    Apr 3 09:08 PM | 1 Like Like |Link to Comment
  • How The Fed Has Exported Inflation And What Happens To Risk Assets When The Money Flows Reverse [View article]
    Christopher

    We can certainly agree on the smart and not candid part.

    We can also agree that China's economy is export driven and therefore they need to support the virtuous circle of sending us our money back by buying our treasuries so we can push that money back into the economy and send it back to them via imports. That has worked for them and allowed us to support GDP through deficit spending - a win/win of sorts.

    That all makes sense to me and I understand it. Now, back to my point - they broke from that model a year ago when they began the process of entering into trade pacts that bypass the dollar. Additionally, they have started selling US treasuries and signaled to us that they no longer intend to maintain the status quo.

    Those are the facts and so one must assume that have a grander vision than a continuation of the status quo. I submit that they are more than willing to suffer short term pain for what they see as long term gain. They are clearly concerned about their own credit bubble but my guess is they are not as concerned about it as they are about revamping the overall system of global trade - a revamping that would benefit them greatly over time.

    My own view is that they have tried to coax the US into sitting down and negotiating a new system that uses a non-sovereign reserve currency for international settlements and the US has simply refused to do so. That being the case, they are taking very calculated and measured steps to establish that they have the wherewithal to force us if they are required to do so. That is not what they want but they do want a new system and that - in my opinion - trumps everything else.

    I guess my point is they are doing things that hurt us and in so doing it hurts them as well - at least in the short term - and they are certainly smart enough to recognize that so there has to be a reason for why they are doing what they are doing and I think the reason is what I said- they are going to have a new system of international trade and they are going to force that upon us and they are in a position to do that if we don't agree to negotiate. The US is not in the driver's seat here.

    JS


    Apr 3 08:52 PM | 2 Likes Like |Link to Comment
  • How The Fed Has Exported Inflation And What Happens To Risk Assets When The Money Flows Reverse [View article]
    Christopher

    "China must sustain the overvaluation of the dollar to drive its export growth (and to destroy the rest of the world's manufacturing)."

    Seems a logical conclusion but the facts suggest otherwise as China is clearly not acting in a way that suggests they want to support the dollar. To the contrary, they are acting in a way that suggests they are taking measured steps to drive the dollar lower. Almost nothing they are doing or have done for the last 12 months fits the position you stated above.

    Maybe you could expand a little on why you think they "must sustain the overvaluation of the dollar" and yet everything they are doing suggests otherwise.


    JS
    Apr 3 07:41 PM | Likes Like |Link to Comment
  • How The Fed Has Exported Inflation And What Happens To Risk Assets When The Money Flows Reverse [View article]
    Coincidentally, Michael Snyder posted a very relevant article on Chinese land purchases recently. I hadn't read the post until I spotted a ZH article this afternoon focusing on the subject and referencing Michael's post. Here are the two articles:

    http://bit.ly/1ikoHyp

    http://bit.ly/1ikoHys?

    http://bit.ly/1ikoHyt

    Anyone who doesn't think the Fed is stuck in a catch - 22 and the Chinese aren't exploiting this situation is simply ignoring the facts. The Chinese are in a position to deliver a one/two punch to the US. First, they are going to start pushing all our money back into the US and into M2 and that will produce inflation and they are going to exploit that with hard asset purchases, e.g., real estate, that will appreciate in an inflationary situation.

    Just a little more evidence that supports the thesis of this article.

    JS
    Apr 3 06:09 PM | 5 Likes Like |Link to Comment
  • The Fed Is Backed Into A Corner With No Way Out [View article]
    77777

    No chance they reverse taper in my opinion. At this point reversing the taper will crash the dollar and that is the catch 22 they are in. The last thing they want now is to crash the dollar and in particular against they yen.

    JS
    Mar 31 10:14 PM | 1 Like Like |Link to Comment
  • Yellen Opens Six-Month Gate [View article]
    Lawrence

    Seems to me the Fed's reverse repo "experiment" is exactly what your are saying it is if I am reading you right. I think we both agree that a lot of leveraged trades exist today. We also know those trades are dependent on positive carry trade metrics that can shift to negative if short term rates spike. We also know if that happens suddenly that the consequence could be catastrophic as it relates to stock price.

    So, the Fed is accomplishing two things - sopping up some of the funding that has been going to carry trades - and in so doing - discouraging new carry trades. That leaves us in a sideways market as no new money is flowing into the carry trades to drive price higher. The second thing is signaling those who currently have carry trades in place that the playing field is shifting and the Fed is attempting to allow them time to slowly unwind the trades while they still remain profitable.

    We both no what happens if short term rates spike sharply or stock prices fall significantly - a massive exodus of stock positions as those in the carry trade are forced out of the trade involuntarily.

    Am I reading you right on this or not?

    In any event I am glad you are focusing on this as I think it is of major significance and I still find almost no coverage on this unprecedented action anywhere - not even on ZH.

    JS
    Mar 30 01:24 PM | 1 Like Like |Link to Comment
  • What's Next For U.S. Stocks? Watch The Yen [View article]
    You are absolutely looking in the right place. It is the yen weakness that necessarily must continue in order to support the one thing that matters and it has nothing to do with economic metrics or investor sentiment and everything to do with the yen carry trade.

    Two things matter in the next few weeks. First, the ECB decision to join the crowd with QE and I doubt they will or even have the authority to do so which means the euro could spike against the dollar and the yen. As it relates to the yen that could be a good thing but as it relates to the dollar a very bad thing. The second thing is the decision at the upcoming G20 meeting that could end with the US isolated and on the outside looking in as everyone else moves away from the US dollar.

    Those that want the party to continue will surely try to poke holes in your argument but it doesn't change the fact that it is the yen carry trade that has fueled this totally irrational stock market bubble and it looks as if the bubble is about to pop.

    JS
    Mar 28 11:05 AM | Likes Like |Link to Comment
  • The Fed Is Backed Into A Corner With No Way Out [View article]
    EK

    In my opinion your position is wrong for the simple reason that they could have reversed the panic and thereafter let normal market action occur. They could have allowed the pre Glass Stegall kind of market movement and economic deleveraging that needed to occur but they chose to step outside the bounds of normal manipulation and embrace a policy that virtually guarantees a much worse end that would have been the case otherwise.

    JS
    Mar 28 10:33 AM | 2 Likes Like |Link to Comment
  • The Fed Is Backed Into A Corner With No Way Out [View article]
    copacetic

    You are correct in that I am saying the market is dependent on the carry trade metrics remaining positive and if they shift to far those shifts will force a liquidation of the trade producing a very sharp sell off - and perhaps much more than most are willing to accept as likely.

    As to the 90/10 strategy and where to go with the 90% I suggested moving into those stocks that are - relatively speaking - at low PE's and with strong balance sheets and relatively high dividends. I think I suggested Verizon, Chevron and Microsoft as 3 possible candidates.

    I also suggested going price neutral on those stocks by writing deep in the money calls. That allows one the opportunity to collect the dividend and the modest time value premium while being indifferent to price direction. One can double the gain potential by using margin. The margin trade is by the way a form of carry trade in that the dividend gain exceeds the borrow cost of the margin play.


    JS
    Mar 26 08:05 PM | 1 Like Like |Link to Comment
  • The Fed Is Backed Into A Corner With No Way Out [View article]
    copacetic

    I tried to think of a simple way to explain the dynamics of a carry trade structure and how a fluctuation in exchange rate would potentially impact the positive metrics of the carry trade and decided to refer you to this piece from Bloomberg:

    http://bloom.bg/1pyZG56

    The problem is there are so many variables that come into play in some of these carry trades that a simple one size fits all answer doesn't exist. The article might provide some insight.

    Here is a carry trade construct that I came up with that exploits the higher rates in China. Assume you hypothecate an asset and receive dollars which you convert to yuan. Then you buy physical copper with the money and sell copper futures 12 months out. In a typical contango market the distant months will be priced at a premium equal to the carry cost which is composed of the interest rate and the storage cost. You are bearing the storage cost so no gain is realized there but you should be able to capture the difference between the low borrow cost and the higher rate reflected in a contango market in the deferred futures contract. The gains are small but the physical commodity price risk is effectively hedged in the futures market so price fluctuation shouldn't be an issue. All you are pocketing is the carry cost which is - in this example - much higher in China than in the US or Japan. To make the trade work though you borrow very short term which is at the present the lowest possible rate and you end up rolling that loan forward over and over and in so doing you keep the low rate for the duration of the trade while receiving the longer rate and in a currency that has a higher overall rate in the first place.

    Where the risk lies in that trade - a trade that seems pretty much a guaranteed profit - is when the short term rates fluctuate, the swap rates shift, the rates shift in China or liquidity just dries up all together. Since the only way to make decent profits is through leverage the impact to the one employing the trade can be huge when the metrics that existed at the outset shift.

    Not sure I explained that very well but the point is some of these carry trades are dependent on a number of variables remaining constant and when they get out of whack what was profitable is suddenly producing a loss.

    Here is an excerpt from the article I referenced above:

    "The extra interest payments to lenders of yuan in one-year cross-currency swaps slumped more than 1.5 percentage points in the past eight months to a two-year low of 1.02 percent on Feb. 24, reflecting rising demand for dollars. The yuan in Hong Kong weakened 2 percent in the past month, Asia’s worst decline, to 6.1560 per dollar. Holders of products called Target Redemption Forwards will suffer significant losses should it fall into the “danger zone” between 6.15 and 6.20, Morgan Stanley estimates."

    JS
    Mar 26 06:14 PM | 1 Like Like |Link to Comment
  • The Fed Is Backed Into A Corner With No Way Out [View article]
    Lawrence

    Well, I always appreciate hearing your views and I think my readers gain valuable insight from your comments so thanks for the input.

    JS
    Mar 26 03:38 PM | 3 Likes Like |Link to Comment
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