Big Week For The Once Mighty Dollar

Big Week For The Once Mighty Dollar

Be warned, this is a short post.

Janet Yellen and the Fed surprised markets this week by actually doing what they said they would do. Shocking!

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If you could not tell from the tone of my first sentence, I was not in the least bit shocked, and had shorted some EURUSD. What I was not expecting, however, was that despite the Fed’s hawkish surprise, the dollar barely budged.

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The lack of a dollar move is especially concerning when we consider the context of the move. So far this year the DXY has fallen over 11% against the backdrop of consistent Fed tightening.

Meanwhile speculators haven’t been this short the dollar in over 4 years.

The lack of a dollar rally at this juncture given spec positioning and the dollar’s dramatic fall is a bit concerning here for those of us who were trying to catch a bottom in this dollar rout (guilty). Now it’s only been a few days since the Fed indicated its hawkish intentions, but if you were to ask me right now, I’d be leaning towards a continued breakdown in the dollar.

What’s interesting about this continuation of the dollar’s fall is the threat it poses to the low volatility regime we find ourselves in. Large moves in any direction for any major asset class is bound to cause ripples even if the move is initially seen to be as a positive.

The issue here is that the ECB and the BOJ have kept rates so low for so long that the savers in their respective countries have been forced into incredibly dumb trades. For example, being long USDs and long USTs…

Read that number again, and then read it again. European investors bought almost $600B of US debt last year. Perhaps these foreigners are the real speculative position we should worry about. The dollar has fallen 15% against the euro this year alone. At what point does the fall in the dollar become too painful? How many years of income must these foreigners lose to currency effects before they start to hit the sell button?


DISCLAIMER: This blog is the diary of a twenty something millennial who has never stepped foot inside a wall street bank. He has not taken an economic or business course since high school (which he is immensely proud of) and has been long gold since 2012 (which he is not so proud of). In short his opinions and experiences make him uniquely unqualified to give advice. This blog post is NOT advice to buy or sell securities. He may have positions in the aforementioned trades/securities. He may change his opinion the instant the post is published. In short, this blog post is pure fiction based loosely in the reality of the ever shifting narrative of the markets. These posts are meant for enjoyment and self reflection and nothing else. So ENJOY and REFLECT!

 

Long Day’s Journey Into Night: A Bear’s Search For Proper Shorts

Long Day’s Journey Into Night: A Bear’s Search For Proper Shorts

As a pessimistic China observer (naive western perma bear), I’ve wanted to short emerging markets for sometime. For my sake I’ve been very patient on this trade and haven’t fancied a go on the dark side, unless you count my 2nd failed attempt to short the Superhuman Canadian Banks. Luckily there was an ongoing implosion in US retail industry that has kept me busy. But even that trade appears less appetizing these days. So here I am, a bear without anything to short, which is partly why I’ve turned my attention to the rip roaring Emerging Markets, but I swear I have other good reasons.

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Whatever happened to Brendan Fraser? I guess the same question could be asked about the dollar bulls.

 

Anyway you slice it, USD positioning is not only incredibly bearish, but just 9 months ago incredibly bullish. The shift in investor positioning  is enough to give a person mental whiplash. Why the sudden shift you ask?

Such a shift in sentiment is not without a narrative to support it.

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I’m not mocking the proponents of this theory, although it certainly seems like I am, I swear (see previous Mummy reference) that I’m not. I just happen to sincerely doubt the speculators who switched from net long to net short are capable of such deep thought and will only come to their sense after they realize they’ve overreached.

As the infinitely evil DarthMacro likes to argue the USD will lose reserve currency status eventually but until then there are likely to be a few tradable scenarios in which we don’t have to sell the dollar into oblivion. Now MIGHT just be one of them…

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Because last time I checked, the USD is still THE world’s reserve currency.  As much as certain countries want to shift to a new regime, the high levels of debt and fragilities built into the current system make that virtually impossible. A clear example is the EU and the Euro. Although recently, some rather smart people have started to suggest that in fact the EU can handle a stronger Euro.

The note was from September 5th, but little did I know, 2 days before I made this tweet that in fact the French had begun to protest the much needed labor reform, although not in “great” numbers. There’s a star wars reference in here somewhere…

And yet, despite the mild protests, if your are an exporting economy and your currency strengthens 15% against a major trading partner, it’s going to hit you no matter what. Just look at the German DAX (blue) versus the Euro (black).

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By the way, before I go any further, is there a more bullish sign out there than a heavy exporting economy’s stock market moving up in lockstep with a stronger currency?  I’m sure some really smart macro guys picked up on this, unfortunately I was not one of them. But I digress because right now the DAX is having trouble rallying into this “excessive” Euro strength.

It’s bad enough for Germany, but what about countries like Greece, Spain, and Italy who were already suffering under a currency too strong for their own good. Fellow European exporter, Sweden has seen its economy take a turn for the worse.

Why is this significant?

After doing a little digging (aka a simple google search), I found Sweden’s top ten export markets to be as follows: Germany (10.3%), Norway (10.1%), US (7%), Denmark (6.9%), Finland (6.7%), UK (5.9%), Netherlands (5.3%), Belgium (4.5%),France (4.3%), China (3.8%) and Poland (3.2%).

Sweden mostly exports to Northern European countries. Meanwhile a large part of the resurgent EU story is actually a southern rebound story. Countries like Italy and Spain even Greece have started to show signs of life. Of course the Euro was already too strong for these countries. One can only imagine what the 15% rise YTD has done to their future growth prospects.

It is important to remember that the level of a currency is not as important as the magnitude and direction of change. The last time the dollar was at this level in 2014, emerging markets were undergoing a massive correction, commodity markets were in complete disarray and china was seemingly on the verge of a complete implosion. Once again I reiterate this does mean I think the EU is about to implode under a stronger Euro, just that the monetary union’s economies are about to take a breather…

Speaking of China, the rising power seems to be making trade deals every day to wean itself off its dependence of the US and the USD.

Have any of the dollar bears asked why China needs to do these trade deals in the first place? Oh yeah, because the US is a key trade partner and the USD is an ESSENTIAL cog in global trade as it stands right now. Removing the USD from the global economy would be tantamount to bleeding the global economy dry. Global trade would grind to halt, and everyone would be worse off. No one wants that. But I digress…

Because China’s economy has been running hot on the back of a poop ton (technical term) of stimulus and the weaker dollar.

What is often missed in this post Jan 2016 correction world is that China has gone from an exporter of deflation to an exporter of INFLATION, and given the fall in the USDCNY this should show up in the US in a big way towards the end of the year catching a lot of people off guard.

Can rates in Europe and Japan going to follow the US higher? With the NIRP and QE programs still in place I’m not so sure. Draghi certainly has the potential to tighten, so I won’t count the euro out. But the yield curve controlled Yen in this scenario?

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At the very least, it seems like we are setting up for a bit of 2016 Q4 redux, where rates in the US rise higher than they do in the EU and Japan and the dollar strengthens. Given investor positioning, rising rates and a stronger dollar could set up for quite the pain trade. Not only are investors very bearish the USD, they are also very long UST duration.

Retail investors going hard in the paint for that $TLT.

Should probably ask some of my millennial friends what they think of dividend stocks.

And just so we are clear on the size of the potential tinder available to such a pain trade…

 

If you’re an EM investor it might even get worse, because China’s economy due to base effects and waning stimulus is set to slow into the end of the year.

Did Klendathu find his desired short trades? Perhaps. It seems that higher US rates are in the cards, and given USD positioning, we could see a rebound in the USD, but I wonder if we have in fact seen the highs for the USD this cycle.


 

DISCLAIMER: This blog is the diary of a twenty something millennial who has never stepped foot inside a wall street bank. He has not taken an economic or business course since high school (which he is immensely proud of) and has been long gold since 2012 (which he is not so proud of). In short his opinions and experiences make him uniquely unqualified to give advice. This blog post is NOT advice to buy or sell securities. He may have positions in the aforementioned trades/securities. He may change his opinion the instant the post is published. In short, this blog post is pure fiction based loosely in the reality of the ever shifting narrative of the markets. These posts are meant for enjoyment and self reflection and nothing else. So ENJOY and REFLECT!

 

Buy Low: Cripples, Bastards and Broken Things

Buy Low: Cripples, Bastards and Broken Things

I’ve struggled to write this article for over a month now. Thinking about the most clever way to talk up the bull case for oil. With the potential breakdown in the USD I thought about just saying dollar bear market = commodity bull market. But let’s face it, that’s far too obvious and I’ve already done that

” I believe on a cyclical basis that commodities have bottomed or are in the process of bottoming. Maybe oil retests the 2016 lows, but overtime it should head higher, US shale be damned.”

Then I thought about incorporating the oil bull case with the fiat bear case. Because when every central banker is behaving like the Mad King Aerys Targaryen, shorting fiat in terms of real assets is a no brainer (maybe some other time though).

Instead, I thought it important to focus on something Opa used to tell me:

 “Buy low.”

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RIG, a company we own through the ETF OIH, is down over 95% from its ATHs and was recently trading at the lowest point in its 23 years. To put that in perspective, RIG fell 50% FOUR times. The multi year trend of rising RSI momentum and repeated failure to mark a new low is reminiscent of the pattern in the Euro we saw at the in December of last year. To be clear this trade is not without risks.

But as contrarians we welcome such news. If we look at the broader OIH ETF which includes as basket of these names. We’ll see a similar pattern bottoming pattern to RIG’s.

OIH123.pngThink about what this chart is telling you. Think about the statement the market is making in regards to the oil industry. Offshore oil drilling is dead.

If US shale is really a technological revolution, why have the producers underperformed the commodity since the bottom in 2016?

And yet we are led to believe that oil prices will be contained in a 40-60 range. As Jawad Mian recently noted, complacency towards this mythical range is reminiscent of the view from 2011-2014 that oil would remain above $100 in perpetuity. And with the largest cut in capex since 1998, this seems unlikely to say the least.

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Meanwhile, it’s been up to US shale to make up the difference in capex. I’ve recently read a couple of skeptical reports on the technological revolution that is the US shale industry. One of which comes from my friend @IndiePandant who makes a strong case that the shale revolution is not all it’s cracked up to be.

Then there’s a man who is as smart as he is skeptical, Russell Clark, who brings up a number of key questions in a recent piece such as the rapid decline rates of US shale, the heavy concentration in the Permian and Eagle Ford plays, and the incredibly poor returns on capital. And then of course there’s the plateauing US rig counts.

If the rig count is plateauing, why are predictions for US oil production growth continuing to rise?

 

And if the bearish oil case was only a bullish US shale case, that might be enough, but it gets better much better…

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In case you haven’t learned to zig when The Economist zags yet…

The “Electric Vehicle crushing oil demand” story is completely overblown. Mass adoption, or even marginally higher rates of adoption continue to be pushed further and further out into the future. Meanwhile oil demand is booming baby.

It is likely that the weaker dollar combined with China’s fiscal stimulus have reawakened global oil demand. Although Emerging markets are not booming like they used to, they are still growing, and require more and more energy to fuel their growing economies. So not only is it likely that have we overestimated future oil supply, it’s likely we have underestimated future oil demand as well.

At a time when the all knowing oil gods cannot survive,
perhaps it is time for contrarian millennials who know nothing to thrive.


 

DISCLAIMER: This blog is the diary of a twenty something millennial who has never stepped foot inside a wall street bank. He has not taken an economic or business course since high school (which he is immensely proud of) and has been long gold since 2012 (which he is not so proud of). In short his opinions and experiences make him uniquely unqualified to give advice. This blog post is NOT advice to buy or sell securities. He may have positions in the aforementioned trades/securities. He may change his opinion the instant the post is published. In short, this blog post is pure fiction based loosely in the reality of the ever shifting narrative of the markets. These posts are meant for enjoyment and self reflection and nothing else. So ENJOY and REFLECT!

USD Bull Market: Hanging By A Thread

USD Bull Market: Hanging By A Thread

The US dollar is the most important variable in macroeconomics and it has reached a critical juncture. After hitting multi-decade highs, the BIS labeled “global risk indicator” has fallen over 10% and is now on the verge of breaking key technical levels. In short, the USD bull market is hanging by a thread.

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Speculative dollar positioning was deeply caught off sides at the peak and has since flipped bearish. From the FT:

“Investment funds last year wrongly ramped up their bets on the greenback climbing, but according to CFTC data they are now net “short” for the first time since mid-2014 — after which the US currency went on a wild rally.”

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Conventional wisdom here suggests, you go long the dollar with a well defined stop…

And yet, structurally, the dollar looks as weak as it did back in the early 2000’s.

The parallels don’t stop there.

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Even though the dollar has not yet officially broken down against other major CURRENCIES, there are major breakouts in financial assets that are very sensitive to the dollar. Perhaps most importantly are the Emerging Markets which using the total return of the ETF $EEM as a proxy are breaking out of a decade long consolidation.

Even the much hated Caterpillar, a global economic bellwether, which had suffered declining sales for over 3 years before recently returning to positive sales growth has hit all time highs.

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The new all time highs in both CAT and EEM are reflections on the falling dollar and global growth which hit a post crisis high. More than 2/3rds of OECD countries are actually experiencing “accelerating growth”.

But global growth cannot continue without a response from the commodity complex (another dollar sensitive asset class) which appears to be finally emerging from a +5 year bear market. Gold, the ultimate short dollar trade and usually the first mover of any commodity bull market, bottomed in 2015 and has recently broken above its multi-year downward trend line.

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Copper and other base metals have been on a rampant run as of late as well.

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Here’s a chart of Alcoa, also breaking out of its post-GFC box.

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If that wasn’t enough, here comes the Fed to bottom tick commodity based inflation.

Fed trolling aside, while the dollar has not yet broken down completely, the price action across EM equities and commodities suggest that it is highly likely that the dollar has further to fall… BUT!

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But that does not mean the dollar is about to break down. I don’t think the Fed is aware of the full effects of its Quantitative Tightening (QT) program. As the Fed readies its QT, the US treasuring is planning to further drain dollar liquidity by issuing $500B of new notes by the end of the year.

So when you combine the falling dollar liquidity at a time when speculators are on the other side of the boat with a key technical stop, you get a no brainer trade. Especially if you are someone like me who is positioned for some of these longer term bearish dollar trades, it makes too much sense not to hedge some of that risk over the shorter term. As such, the Klendathu Capitalist has started buying dollar calls. We’ll see how that works out for him. Cheers!


DISCLAIMER: This blog is the diary of a twenty something millennial who has never stepped foot inside a wall street bank. He has not taken an economic or business course since high school (which he is immensely proud of) and has been long gold since 2012 (which he is not so proud of). In short his opinions and experiences make him uniquely unqualified to give advice. This blog post is NOT advice to buy or sell securities. He may have positions in the aforementioned trades/securities. He may change his opinion the instant the post is published. In short, this blog post is pure fiction based loosely in the reality of the ever shifting narrative of the markets. These posts are meant for enjoyment and self reflection and nothing else. So ENJOY and REFLECT!