Excellent question.. Looks to me like the long end liked that Fed remains hawkish and has formed a short term top... Do you think long term rates go higher from here?
Hi Jeff, do you mind if I take a shortcut into the TLT topic to ask where you would suggest or are looking to take a long-term position in TLT (if indeed you mean it as an investment rather than a swing trade)? My broker is great with spreads for short-term trading, but also told me straight that there are a lot more cost-effective options out there.
I guess IB is a global standard given the low fees and feature list, and I've seen a few that less known names with no commissions or fees, but I'm not quite sure what would be a good option and thought maybe you would like to share. It suppose it might also depend on the geography. Thanks!
I'm waiting for this week's Treasury auctions (mentioned in my substack as I'm a tactical swing trader) as we have the big 10 YR and 30 YR auctions on Wed and Thurs, respectively. I am forecasting that money will flow to bonds as we get closer to the terminal rate and what it will end up being. The Fed is unclear on that for now, but it is likely to be around 6% as they told us they will take it higher than 5%. This will reprice all equities valuations and since we are entering recession in the future, bonds will become the new "TINA" and once the inflection point happens, TLT will reverse.
My question was regarding your choice of broker(s) with the lowest fees for long-term holding, but that's ok, it is probably different in your jurisdiction or where you are based. Thank you for the feedback!
I have a LT account on E-trade as well as my 401k and also use them to buy any OTCs as they have access to them. And use WeBull for swing trading since the mobile to iPad to desktop apps are pretty solid for that.
Sorry, I should’ve read your question more clearly since it’s towards the end of your comment.
Powell seems to think, that it is possible and even easy to fix something, that gets broken by overtightening. You just back off a bit and print some more money.
Any engineer knows, that overtightening very often causes irreparable structural damage. That’s what’s going to happen in the financial system, maybe quite soon.
That's what I'm thinking as well. They just can't be that stupid that they cause the structural damage unintentionally. Expect radically increasing control of everything.
Can't they be that stupid? They don't really understand how the monetary system works. The whole deal in 2018, the Fed was buying t-bills and taking them out of the system when the dealers desperately needed that high quality collateral. It was a brilliant example of the Fed having no idea how stuff works.
There indeed is plenty of evidence about stupidity as well, especially about how the market actually works. I hate it when the only two plausible explanations are "they're morons" and "they're evil". If they're morons, then they are "guided" by someone, who's evil. If they're evil, then they are guiding us to a place where we definitely should not be going.
New "P" word is "Prolongation" of higher rates, very necessary as it will take at least 2 years to regain control of inflation, if Fed loosens prematurely which is the greater mistake the Fed can do, then we will have more pain to come for more years. The sooner, the better
As Powell said: "The end point of rate increases will be higher than previously expected and that the greater mistake would be lack of tightening or premature loosening"
Would love to ger your (and others here) take on what will happen with inflation in the mid to longer term. Will we be going back to the 2-2.5% area in 3-5 years? Or are we in a regime change and we should expect it to be higher during this decade? Will Mr powell succeed in his quest of slaying the inflation dragon?
Really cool information again, thanks for this excellent free service. Does the macro compass have it's own website somewhere? Substack is a little buggy it seems, the login part, the newsletter by itself works just fine.
Regarding the long VIX in the Quadrant 4. VIX keeps going down even when SPX goes down. This means that the dealers agree to sell OTM puts at lower and lower prices. This also means that the hedgers and speculators are not keen on buying the downside protection even though smart analysts like and and well-known strategists in the banks are mostly saying that the big low is still ahead. I've been trying to reconcile it for a while but I can't. Any thoughts?
Hi Sasha, the Vix has become less sensitive to S&P moves in the last few months. This is because many money market managers/hedge funds have exited the S&P and are sitting on cash, (they are waiting for dip buying retail investors to be wiped out) , once they think enough retail investors have exited the market, they will step in and start buying at lower prices. When these money market managers/headfunds are in the market they hedge their positions, thus there is a greater volume of puts and this is reflected in the Vix spiking when risk events occur , currently because there are fewer money managers in the market, the volume of puts is lower then usual and the VIX is responding in a more tepid manner. Basically risk events will need to be bigger for the VIX to spike., until the volume of puts picks back up.
Thank you, Sue. You're right about positioning and this explains the low demand for puts. Still, it doesn't explain low implied vols offered by the dealers (not that they are desperate to sell OTM puts) nor the unusual reverse correlation between VIX and the underlying.
If one believes that the big low is south of 3300 (and a lot of people do) then they could buy a 3300 Dec-23 put for about 200 (or Jun-23 for 125, or Mar-23 for 80) today and make a lot of money. There should be a lot of demand for that but apparently there isn't. I have to conclude that nobody really believes in this scenario, at least not enough to bet any money on it. And I find it strange.
Hi Sasha, I think there will be some interesting retail sales data released after xmas, and CPI data,. Also employment picks up over Xmas as lots of casuals are taken on, will have to look at 2019 and before for comparisons. Post Feb is when reality kicks in for consumers when they receive their credit card bills and payments are due. How the market will respond, i dont know,, 3400 is more likely next year, but if analyst start downgrading eps before then, it could happen sooner.
Hi Sasha, regards the correlation there are times it will be in reverse, most of the time I would say its a low correlation but still positive. I agree with you that what people say they think will happen and what they believe will happen in reality is different, actions speak louder then words. For me S&P south of 3300 can happen in different ways and each way has different probabilities attached to it. I think there will be either several further lows until we reach the bottom or there will be one large leg down to the bottom, or a combination of the two. I feel the combination theory, has the highest probability. Regards cash on the sidelines, historically when fund managers/investors are sitting on high levels of cash, volatility falls, at the moment I think cash levels are around 6%, this is considered high. Also even though there is a lot of risk around, there is also a lot of money in the economy (2019 M2 15trillion, 2022 21 trillion), QT hasnt really taken effect and this time the Fed is proceeding with more caution regards QT. This may be another reason vix has remained lower then other time in history. I have lowered the levels at which I have been buying the vix , over the last 6 months, I have also been reducing the size of my positions. I have found that shorting the russell has worked better for me but the stronger usd has supported the russell recently, since many russell companies derive their sales domestically, and havent been negatively impacted by the higher dollar.
I just did the calculation. Long term correlation keeps fairly stable around -72%. Last month, since Oct 3, it was -62%, and last 4 trading weeks since Oct 10 it was -55%. I know correlations are fickle and such things must have happened before. So I looked... The previous (even more) interesting episode happened during the week of April 13, 2020, when the correlations were down to -26% and was followed by a massive rally. The one before was in Dec 17 when the stocks were already off-lows. The largest decorrellation even peaked on Mar 7, 2017 when the 4 weeks correlation went almost to zero and was followed by ... a sideways market. Alas, there are no conclusions to be drawn from that alone.
Hi Sasha, have you looked at what happened to the direction/ volume of puts and fund flows during those periods? Yardeni.com produce some upto date charts on this, morningstar also produces free research with commentary. A bloomberg would be better still but I dont have one (I am looking at ways to make this more affordable, such as sharing a terminal/cost with some people (I live in Australia so one way may be to share a subscription with people in different time zones). What research/trading platforms etc do you use?
Hi Sasha, please excuse my confusing communication regards correllation, yes normally correllation is negative between the vix and S&P 500, when I said it turned positive I meant the negative correllation reverses at times, I am wondering if ETF fund flows have anything to do with this, eg negative S&P 500 fund flows due to ETF specific factors which are not correllated with level of risk , also taxation, such as investors cashing out for tax reasons, this may explain the reversing of correllation in Dec 17 (end of tax year Dec 31) as this event wouldnt neccessarily be associated with risk, thus S&P falls and Vix is little effected. The March 17 episode could be a time lag effect, QT began in June 17 just 3 months later. Did the strength of the correllation in June 17 rise to counteract the reversal of correllation in Mar17? The question is what are the reasons the S&P 500 can fall without inceased market risk as the trigger? thus resulting in a lower requirement for puts. and flat or lower VIX.
Very smart point and I noticed he talked about forward inflation expectations and core PCE.
I think though core is likely to stay sticky for a while due to the lagged effect of certain services prices calculations (see rent of shelter) and hence it won't make a major difference in the assessment that Powell will keep rates at 5% until he is totally sure core PCE is converging quickly to the sub 3.5% area. Just from a risk management perspective, as he highlighted himself.
Hi Alf! Unless the big announcement on the 10th has anything to do with this... ;-)
Could you please let me know without taking much of your time what would be the Short-Term Treasuries yielding 4%+ returns that you spoke about? I've been mostly in cash all year (and part of 2021) and I'm getting anxious seeing it devalue unnecessarily.
As I reconciled my latest Fidelity statement, I couldn’t help but notice that dividends from my 2 money market accounts (SPAXX and FDRXX) easily beat what I received from BSV, roughly matched what I received from AGG, and were marginally less that what I received from BLV and TLT.
For the past couple of months, I have been generating losses by tax harvesting out of BSV and into the money market funds, while at the same time gently levering into AGG, BLV, and TLT. I feel like the risk/reward from this play will be better over the next year or so than sticking with much at all in BSV.
The vastly improving money market rates are giving investors a lot of optionality to stash a lot of cash and then watch for opportunities.
This was a good read thank you!
Do you think TLT is near bottom? FED has not pivoted yet.
Thank you!
I am being very patient in buying bonds: only added once on Jun 23rd and was way too early.
But I suspect we are getting closer and closer to a point where the risk/reward profile of bonds will look pretty good.
Excellent question.. Looks to me like the long end liked that Fed remains hawkish and has formed a short term top... Do you think long term rates go higher from here?
I’m waiting to go long TLT, great article, you are a national treasure sir 🫡
Too kind :)
Hi Jeff, do you mind if I take a shortcut into the TLT topic to ask where you would suggest or are looking to take a long-term position in TLT (if indeed you mean it as an investment rather than a swing trade)? My broker is great with spreads for short-term trading, but also told me straight that there are a lot more cost-effective options out there.
I guess IB is a global standard given the low fees and feature list, and I've seen a few that less known names with no commissions or fees, but I'm not quite sure what would be a good option and thought maybe you would like to share. It suppose it might also depend on the geography. Thanks!
I'm waiting for this week's Treasury auctions (mentioned in my substack as I'm a tactical swing trader) as we have the big 10 YR and 30 YR auctions on Wed and Thurs, respectively. I am forecasting that money will flow to bonds as we get closer to the terminal rate and what it will end up being. The Fed is unclear on that for now, but it is likely to be around 6% as they told us they will take it higher than 5%. This will reprice all equities valuations and since we are entering recession in the future, bonds will become the new "TINA" and once the inflection point happens, TLT will reverse.
Not what my comment was about, but thank you anyway. I subscribed to your page.
I will go long TLT stock and call options when I see confluence in the data, sorry if I wasn’t clear about that.
My question was regarding your choice of broker(s) with the lowest fees for long-term holding, but that's ok, it is probably different in your jurisdiction or where you are based. Thank you for the feedback!
I have a LT account on E-trade as well as my 401k and also use them to buy any OTCs as they have access to them. And use WeBull for swing trading since the mobile to iPad to desktop apps are pretty solid for that.
Sorry, I should’ve read your question more clearly since it’s towards the end of your comment.
Wonderful as ever Alf, we readers are lucky to have you!
Pretty much any asset is a risk asset now
Thank you, RIch!
Powell seems to think, that it is possible and even easy to fix something, that gets broken by overtightening. You just back off a bit and print some more money.
Any engineer knows, that overtightening very often causes irreparable structural damage. That’s what’s going to happen in the financial system, maybe quite soon.
Indeed, the risks to financial stability increase once you stress a leveraged system for long.
Good point! Maybe that's what they are aiming for... that would pave the way for a Bretton Woods II
That's what I'm thinking as well. They just can't be that stupid that they cause the structural damage unintentionally. Expect radically increasing control of everything.
Can't they be that stupid? They don't really understand how the monetary system works. The whole deal in 2018, the Fed was buying t-bills and taking them out of the system when the dealers desperately needed that high quality collateral. It was a brilliant example of the Fed having no idea how stuff works.
There indeed is plenty of evidence about stupidity as well, especially about how the market actually works. I hate it when the only two plausible explanations are "they're morons" and "they're evil". If they're morons, then they are "guided" by someone, who's evil. If they're evil, then they are guiding us to a place where we definitely should not be going.
New "P" word is "Prolongation" of higher rates, very necessary as it will take at least 2 years to regain control of inflation, if Fed loosens prematurely which is the greater mistake the Fed can do, then we will have more pain to come for more years. The sooner, the better
As Powell said: "The end point of rate increases will be higher than previously expected and that the greater mistake would be lack of tightening or premature loosening"
Absolutely, he has been very clear about wanting to avoid premature loosening.
Would love to ger your (and others here) take on what will happen with inflation in the mid to longer term. Will we be going back to the 2-2.5% area in 3-5 years? Or are we in a regime change and we should expect it to be higher during this decade? Will Mr powell succeed in his quest of slaying the inflation dragon?
Don't spoiler my next article! :)
Really cool information again, thanks for this excellent free service. Does the macro compass have it's own website somewhere? Substack is a little buggy it seems, the login part, the newsletter by itself works just fine.
I solved that by just downloading the SubStack app on mobile. Works like a charm now :)
All I publish is here on Substack, but as I said there are some news on Nov 10 :)
??? Today's big surprise is that there is no newsletter any more? That's shocking!
Regarding the long VIX in the Quadrant 4. VIX keeps going down even when SPX goes down. This means that the dealers agree to sell OTM puts at lower and lower prices. This also means that the hedgers and speculators are not keen on buying the downside protection even though smart analysts like and and well-known strategists in the banks are mostly saying that the big low is still ahead. I've been trying to reconcile it for a while but I can't. Any thoughts?
Sasha, this is a very smart comment and I will tackle the VIX story in one of my next articles :)
Hi Sasha, the Vix has become less sensitive to S&P moves in the last few months. This is because many money market managers/hedge funds have exited the S&P and are sitting on cash, (they are waiting for dip buying retail investors to be wiped out) , once they think enough retail investors have exited the market, they will step in and start buying at lower prices. When these money market managers/headfunds are in the market they hedge their positions, thus there is a greater volume of puts and this is reflected in the Vix spiking when risk events occur , currently because there are fewer money managers in the market, the volume of puts is lower then usual and the VIX is responding in a more tepid manner. Basically risk events will need to be bigger for the VIX to spike., until the volume of puts picks back up.
Thank you, Sue. You're right about positioning and this explains the low demand for puts. Still, it doesn't explain low implied vols offered by the dealers (not that they are desperate to sell OTM puts) nor the unusual reverse correlation between VIX and the underlying.
If one believes that the big low is south of 3300 (and a lot of people do) then they could buy a 3300 Dec-23 put for about 200 (or Jun-23 for 125, or Mar-23 for 80) today and make a lot of money. There should be a lot of demand for that but apparently there isn't. I have to conclude that nobody really believes in this scenario, at least not enough to bet any money on it. And I find it strange.
I rather like 3400 March put for 100. Looks like a good trade.
Hi Sasha, I think there will be some interesting retail sales data released after xmas, and CPI data,. Also employment picks up over Xmas as lots of casuals are taken on, will have to look at 2019 and before for comparisons. Post Feb is when reality kicks in for consumers when they receive their credit card bills and payments are due. How the market will respond, i dont know,, 3400 is more likely next year, but if analyst start downgrading eps before then, it could happen sooner.
I believe Goldmans downgraded on Friday.
Hi Sasha, regards the correlation there are times it will be in reverse, most of the time I would say its a low correlation but still positive. I agree with you that what people say they think will happen and what they believe will happen in reality is different, actions speak louder then words. For me S&P south of 3300 can happen in different ways and each way has different probabilities attached to it. I think there will be either several further lows until we reach the bottom or there will be one large leg down to the bottom, or a combination of the two. I feel the combination theory, has the highest probability. Regards cash on the sidelines, historically when fund managers/investors are sitting on high levels of cash, volatility falls, at the moment I think cash levels are around 6%, this is considered high. Also even though there is a lot of risk around, there is also a lot of money in the economy (2019 M2 15trillion, 2022 21 trillion), QT hasnt really taken effect and this time the Fed is proceeding with more caution regards QT. This may be another reason vix has remained lower then other time in history. I have lowered the levels at which I have been buying the vix , over the last 6 months, I have also been reducing the size of my positions. I have found that shorting the russell has worked better for me but the stronger usd has supported the russell recently, since many russell companies derive their sales domestically, and havent been negatively impacted by the higher dollar.
Beautiful to see The Macro Compass community engaging in these kind of insightful debates in the comment section!
I just did the calculation. Long term correlation keeps fairly stable around -72%. Last month, since Oct 3, it was -62%, and last 4 trading weeks since Oct 10 it was -55%. I know correlations are fickle and such things must have happened before. So I looked... The previous (even more) interesting episode happened during the week of April 13, 2020, when the correlations were down to -26% and was followed by a massive rally. The one before was in Dec 17 when the stocks were already off-lows. The largest decorrellation even peaked on Mar 7, 2017 when the 4 weeks correlation went almost to zero and was followed by ... a sideways market. Alas, there are no conclusions to be drawn from that alone.
Hi Sasha, have you looked at what happened to the direction/ volume of puts and fund flows during those periods? Yardeni.com produce some upto date charts on this, morningstar also produces free research with commentary. A bloomberg would be better still but I dont have one (I am looking at ways to make this more affordable, such as sharing a terminal/cost with some people (I live in Australia so one way may be to share a subscription with people in different time zones). What research/trading platforms etc do you use?
Hi Sasha, please excuse my confusing communication regards correllation, yes normally correllation is negative between the vix and S&P 500, when I said it turned positive I meant the negative correllation reverses at times, I am wondering if ETF fund flows have anything to do with this, eg negative S&P 500 fund flows due to ETF specific factors which are not correllated with level of risk , also taxation, such as investors cashing out for tax reasons, this may explain the reversing of correllation in Dec 17 (end of tax year Dec 31) as this event wouldnt neccessarily be associated with risk, thus S&P falls and Vix is little effected. The March 17 episode could be a time lag effect, QT began in June 17 just 3 months later. Did the strength of the correllation in June 17 rise to counteract the reversal of correllation in Mar17? The question is what are the reasons the S&P 500 can fall without inceased market risk as the trigger? thus resulting in a lower requirement for puts. and flat or lower VIX.
Alf, didn't Powell state he wants to see real rates adjusted for core PCE?
Very smart point and I noticed he talked about forward inflation expectations and core PCE.
I think though core is likely to stay sticky for a while due to the lagged effect of certain services prices calculations (see rent of shelter) and hence it won't make a major difference in the assessment that Powell will keep rates at 5% until he is totally sure core PCE is converging quickly to the sub 3.5% area. Just from a risk management perspective, as he highlighted himself.
Hi Alf! Unless the big announcement on the 10th has anything to do with this... ;-)
Could you please let me know without taking much of your time what would be the Short-Term Treasuries yielding 4%+ returns that you spoke about? I've been mostly in cash all year (and part of 2021) and I'm getting anxious seeing it devalue unnecessarily.
Many thanks!
M.
Hi Miguel!
Depending on your jurisdiction, there are many ETFs that allow you to invest in short-term (1-3y generally) Treasuries
1-3y Treasuries. Gotcha! And thanks for the article.
Great stuff as always Alf. Many thanks!!
Welcome!
Do you think $HYG (High Yield bonds) will bottom along when equities capitulate or will it align more to the bond capitulation ($TLT) ?
High yield tend to follow the path of equities.. but we keep getting surprises.
I think TLT will overperform HYG in the first leg up, as credit spreads will keep widening during the economic downturn ahead
Thank you Alf... Well done and informative!
Glad you liked it!
As I reconciled my latest Fidelity statement, I couldn’t help but notice that dividends from my 2 money market accounts (SPAXX and FDRXX) easily beat what I received from BSV, roughly matched what I received from AGG, and were marginally less that what I received from BLV and TLT.
For the past couple of months, I have been generating losses by tax harvesting out of BSV and into the money market funds, while at the same time gently levering into AGG, BLV, and TLT. I feel like the risk/reward from this play will be better over the next year or so than sticking with much at all in BSV.
The vastly improving money market rates are giving investors a lot of optionality to stash a lot of cash and then watch for opportunities.
''The vastly improving money market rates are giving investors a lot of optionality to stash a lot of cash and then watch for opportunities.''
Very well said!
Thanks Alf. Insightful as always.
My pleasure!
Hi Alf,
Thank you very much - Great article as always !
Can you put some light on the best way to play those short-term Treasuries or highly regulated MMFs ?... for a small account obviously
Many thanks.
Best,
Denis
Hi Denis!
There are plenty of ETFs that allow investors to buy 0-3y US Treasuries