In addition to loving you and your newsletters, I love your Italian compatriots Insigne and Bernardeschi who are now playing for Toronto FC in the MLS - so good! 😇
One question, if you have a moment, when you write " This is the result of a probability distribution that assumes a 50%+ chance of Powell pivoting dovish essentially by year-end already - ****and that probability is already priced in risk assets too.***"
How can I determine what has already been priced in for myself in the future? As in, how can I tell if certain probability is priced in or if the market action is caused by something else entirely?
Your analysis is invaluable and a true service to our community. Thank you
Jul 27, 2022·edited Jul 27, 2022Liked by Alfonso Peccatiello (Alf)
Do you have a 10-2y target for your flattener trade or what are your criteria for switching to steepener?
It looks like historically it troughs at -.25-.5 (81, 00, 08) except in the 70's when it dove down to -2.3%. Are those 70's level inversions even possible today or would the system blow up/pivot long before that due to far higher debt levels?
Thanks for the thoughtful piece Alf. Looking forward to your primer on how to structure a trade. In particular, I would like to know how you set stop loss and targets for your trades. Cheers!
You are teaching me so much on these letters. And also on your twitter feed. I truly hope you keep it up, and that you feel fulfilled in your purpose. Because it's making a difference to a nobody in middle of Nebraska that's trying to find a way thru this maze.
p.s. The personal attacks on you from that other guy on twitter you had to block are very upsetting. I know it stings and is rough, but hopefully you just shrug it off. Us silent majority see thru it.
Great piece, as always, but let's have a bit of a debate, shall we?
I strongly suspect you won't agree with what I am about to say but I'd like to hear how you'd push back, this is how I learn. So there:
I don't believe in risk premia. IMHO, these are not inputs but outputs, fudge factors that are implied from stock prices to "explain" them.
I don't believe that there are many people who have Excel s/sheets or fancy trading screens where risk premia are inputs. Not by headcount, not by $$$ under management.
Last, I do believe most people who trade stocks based on the calculations of risk premia which are in turn a byproduct of some other model underperform the stock market indices, both in terms of total returns and probably Sharpe ratios as well. I went out on a limb with the last part, that was a pure guess.
Second, an honest question. Here's the line that confused me:
> When it comes to future earnings instead, inverted yield curves are as loud as a noise can be: it’s not looking good.
Why? Most of the future earnings are in the far future where the implied discount factor is low compared to near future. So, a few years earnings will be discounted with a relatively large df. (And the time is short in the df formula, too, you know.) So, I'd say it doesn't matter very much whether the curve is inverted. What does matter is the absolute amount of discounting in the long end of the curve, and even more important is the dynamics of this.
Sorry, I've re-read the para above and realized that I am doing the same thing: provoking a strong response to learn something. I hope you won't be angry with me.
Keep 'em coming! This was a great outlook. A little bit lighter than last weeks but informative nonetheless. I can't wait to see how you break down your trades. I mix macro with intraday movements and this helps A TON!
do you also consider European currencies and capital markets? Dax, Tec Dax, FTSE..they are often lagging behind US markets which could make it easy to take advantage?
1) HYG includes both high yield spreads and Treasury yields: be careful out there. HYGH tries to track only high yield spreads in case you are interested in isolating those.
2) I look at the relative valuations within the macro cycle we are in to determine the most palatable asset to lean long/short.
This was an excellent analysis all the way around.
Beyond excellent.
Too kind!
Thank you, always very kind!
In addition to loving you and your newsletters, I love your Italian compatriots Insigne and Bernardeschi who are now playing for Toronto FC in the MLS - so good! 😇
Ahah you must be having fun watching these guys eh, Nicholas? :)
Great analysis.
Thanks, Patrick!
Great analysis as always, Alf!
One question, if you have a moment, when you write " This is the result of a probability distribution that assumes a 50%+ chance of Powell pivoting dovish essentially by year-end already - ****and that probability is already priced in risk assets too.***"
How can I determine what has already been priced in for myself in the future? As in, how can I tell if certain probability is priced in or if the market action is caused by something else entirely?
Your analysis is invaluable and a true service to our community. Thank you
Hi Gene. In order to do that you need to build market-neutral implied probability distributions.
I am working on the data and models - I expect it to be ready by year-end.
Very interesting. I'd love to understand how you do this. Now I have something to Google in the meantime. Thanks, Alf!
Do you have a 10-2y target for your flattener trade or what are your criteria for switching to steepener?
It looks like historically it troughs at -.25-.5 (81, 00, 08) except in the 70's when it dove down to -2.3%. Are those 70's level inversions even possible today or would the system blow up/pivot long before that due to far higher debt levels?
Michael!
Being a tactical trade, once I am in and the macro backs it up I just keep running my profits and moving my P&L and stop targets accordingly.
After we just broke through the -25 bps area I am looking for -37 bps and -50 bps after that.
If proven wrong and price action goes significantly against me, I'll stop the trade and take the accumulated profits so far.
When it comes to the underlying macro, let's hear Powell first.
Thanks for the thoughtful piece Alf. Looking forward to your primer on how to structure a trade. In particular, I would like to know how you set stop loss and targets for your trades. Cheers!
Working on it :)
I enjoyed reading, thanks for you in-depth analysis.
Welcome, BJ!
You are teaching me so much on these letters. And also on your twitter feed. I truly hope you keep it up, and that you feel fulfilled in your purpose. Because it's making a difference to a nobody in middle of Nebraska that's trying to find a way thru this maze.
p.s. The personal attacks on you from that other guy on twitter you had to block are very upsetting. I know it stings and is rough, but hopefully you just shrug it off. Us silent majority see thru it.
Hi Tom! :)
Reading this comment makes me happy.
When it comes to personal attacks: a bag of sh*t can't hurt you; it might smell bad, but it can't hurt you :)
Clear and concise. Excellent.
Thank you, Ron!
Hi Alf, do you know where can noobs track the bunds/btp spread ?
Here you go, Vladimir! https://www.borsaitaliana.it/obbligazioni/spread/italia/btp-bund.en.htm
Awesome! Yes please follow through with it. Really appreciate and enjoy Macro Compass Podcast and Substack Thanks Guys !!!!
Welcome!
Hi Alf,
Great piece, as always, but let's have a bit of a debate, shall we?
I strongly suspect you won't agree with what I am about to say but I'd like to hear how you'd push back, this is how I learn. So there:
I don't believe in risk premia. IMHO, these are not inputs but outputs, fudge factors that are implied from stock prices to "explain" them.
I don't believe that there are many people who have Excel s/sheets or fancy trading screens where risk premia are inputs. Not by headcount, not by $$$ under management.
Last, I do believe most people who trade stocks based on the calculations of risk premia which are in turn a byproduct of some other model underperform the stock market indices, both in terms of total returns and probably Sharpe ratios as well. I went out on a limb with the last part, that was a pure guess.
Second, an honest question. Here's the line that confused me:
> When it comes to future earnings instead, inverted yield curves are as loud as a noise can be: it’s not looking good.
Why? Most of the future earnings are in the far future where the implied discount factor is low compared to near future. So, a few years earnings will be discounted with a relatively large df. (And the time is short in the df formula, too, you know.) So, I'd say it doesn't matter very much whether the curve is inverted. What does matter is the absolute amount of discounting in the long end of the curve, and even more important is the dynamics of this.
Sorry, I've re-read the para above and realized that I am doing the same thing: provoking a strong response to learn something. I hope you won't be angry with me.
Never angry with constructive comments, Sasha!
But the answers to these questions would require another article, basically :)
Keep 'em coming! This was a great outlook. A little bit lighter than last weeks but informative nonetheless. I can't wait to see how you break down your trades. I mix macro with intraday movements and this helps A TON!
Thank you, Vladlen!
As always, excellent macro content. Really detailed and data driven analysis. Thank you for sharing, Alf!
Welcome, Valentino!
great. thank you.
do you also consider European currencies and capital markets? Dax, Tec Dax, FTSE..they are often lagging behind US markets which could make it easy to take advantage?
Hi Thomas!
Yes, I tend to look at every asset class out there :)
Since they move similarly how do you decide when it's better to short equities vs HYG?
Good question.
1) HYG includes both high yield spreads and Treasury yields: be careful out there. HYGH tries to track only high yield spreads in case you are interested in isolating those.
2) I look at the relative valuations within the macro cycle we are in to determine the most palatable asset to lean long/short.