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Portfolio Construction Update

Michael Roat profile picture
Michael Roat


  • Oil, stocks and gold all cannot rise without a corresponding rise in UST yields. The idea that inflation hedge and risk assets can be up but yields down is untenable.
  • A rise in US yields and stronger USD short circuits emerging market economies especially those with USD currency boards who "import" UST yields or have significant USD denominated corporate debt.
  • I have a long USD theme running through the portfolio and am net short/very risk-off but hold long positions in the versatile tanker sector.
  • I am directly short through put options US tech, emerging market equities, precious metals, oil prices and producers, while being long tankers with call options.
  • I am synthetically or thematically long US dollars and short US bonds.
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The last several years of monetary policy has been characterized by hawkish Federal Reserve rhetoric and subsequent tightening of financial conditions followed by the walking back and a return to loose conditions. For example, Bernanke 2013, Yellen 2016 and Powell 2019. The difference now

This article was written by

Michael Roat profile picture
I have approximately 8 years of experience trading and 10 years of researching, specifically relating to central banking and credit cycles. I have developed a keen ability to synthesize and understand complex macroeconomic information very effectively and quickly. I have an in-depth understanding of international capital flows, foreign exchange rates, and global bond, equity and commodity markets. I have extensive experience tracking economic data and developing macro-economic investment theses. I specialize in and often express views relating to currencies, monetary policy, real (inflation-expectation-adjusted) interest rates and bond yield differentials. I avidly read and process daily economic news, analysis and market data. I can contribute to relevant economic thinking and discussion as well as generating and assessing investment ideas using the knowledge I’ve developed through first-hand experience trading in competitive financial markets.Disclaimer: I am not a registered financial advisor. I am a newsletter provider and nothing published under the name Michael Roat or Tri-Macro Research should be considered financial or investment advice.

Analyst’s Disclosure: I am/we are long BZQ, ERY, JDST, REW, EDZ, GLL, ZSL, FXP, SQQQ, YANG, DUG, DHT, FRO, STNG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Short: VALE, RGLD All positions are in option contracts. Many of the "long" positions are inverse ETFs.

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Comments (3)

Michael Roat profile picture
Quick note on the employment report:

This jobs report miss really throws some shade on any short-run inflationary outcome given the labor market is still far from pre-pandemic levels (where we still didn't have 2% persistent core inflation) and healing slower than expected. What it doesn't change is US budget and issuance projections. So I'd say the reaction down in yields is a bit overdone. The driver for yields is mainly the deficit. IMO this report is a tailwind for real-yields because I think inflation expectations will come down here faster than nominals.

In short, there is still too much slack in the labor market and capacity utilization. Growth should stay firm but this really takes a US economic overheating scenario off the table in my view.

Bloomberg Intelligence Chief U.S. Rates Strategist Ira Jersey:

“Treasury Inflation Protected Securities market may consider a repricing of inflation risks with payrolls’ large miss compared with consensus. Longer-term wages are usually driven by employment gains, and with slower employment growth than anticipated, inflation breakevens may decline. The knee-jerk reaction for TIPS yields may reverse some over the course of the day as traders focus more on the inflationary situation than just the bad data.”
JHHAlpha profile picture
Michael, Thanks for a well reasoned note, although I believe it missed one over-riding factor controlling unstated fed policy. In your providing a framework for analyzing and forecasting fed interest rate decision making, you wrote:
" I think it is revolving around preventing or delaying the global downturn I am describing rather than pursuing a goal of price stability, maximum sustainable employment and what is best for the United States. The Fed is placing their “role” as the central bank of the world above their US congressional mandate. "

This framework ignored the rising federal debt that began in response to the 2008 collapse. The debt rose under Obama, and Trump, and is now accelerating under Biden. Managing this huge and expanding debt requires the fed to constrain interest rates and monetize the debt. Thus the USA has entered into a Japanification of its monetary system for as far as the eye can see. Any collapse in China's economy will only strengthen current fed (unstated) policy.
Michael Roat profile picture
@JHHAlpha Hey JHHAlpha. Thank you for always reading and commenting on my articles.

I think the Fed is in a bind in the sense the deficit and issuance has become so large demand for UST's cannot keep up. They could up purchases, shift maturities or implement yields curve control, but I see problems with all three.

1) More QE could send yields higher on inflation expectations and cause an unwanted tightening of EM policy with USD currency boards.

2) Operation twist would just bear-flatten the curve and could de-anchor the front-end.

3) YCC is untenable on the middle to back-end which is the problem (5+ year UST's).

Also you wrote:
"Any collapse in China's economy will only strengthen current fed (unstated) policy".

I agree but the marginal effect of additional QE from the Fed while facing a massive deflationary shock of a China financial crisis or hard economic landing is insufficient. The Fed already fired their bazooka last year and rates are expected to stay at zero for the next couple years. I think the Fed knows it's coming which is why they are so adamant about staying accommodative, but by doing this they are increasing the magnitude of the eventual downturn - pushing risk asset valuations to sky high levels.

China's inevitable landing is the largest road block to any synchronized global recovery and global pickup in inflation. My opinion is it should be allowed to happen. Get it out of the way and move forward. Their banking system needs to be recapped and RMB need to be printed. Until then it will be the same start/stop global economy. When it does the Fed should stay accommodative, don't over-react and keep markets functioning. But if one thinks risk assets won't come down in the scenario they would be kidding themselves especially given the elevated valuations.
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