Global Macro Trading Journal

[Daal]

The fact that Joe Biden is president and the Powell is up for reappointment early next year also should be a factor. If Powell were to even hint at hawkishness he would be fired. Also, Biden will only appoint woky doves from now on (to the board of governors) so little by little the Fed will start to be tilted towards the inflationary side.
Its clear to me the average inflation target framework plus Powell's comment that the risks are no longer capped at the 2% ceilling is an effective increase in the inflation target and its uncertain how high the inflation target now is

 

[Daal]

PSTH UMG stake is an indirect way to play NFTs. All those artists (like Taylor Swift) will get into NFTs at some point and fans will pay. I'm sure UMG will take their cut

 

[Specterx]

So, about that US dollar bull or bear debate. I think I'm starting to get more confident that the bears will win.

The chart above shows what issue that the Fed faces. Corporate leverage went UP after 2008 up until Covid, and then during Covid and it went up AGAIN. Households and State and Local govs did deleverage after 2008 but the Fed gov didn't. So net net, US leverage (total debt to GDP ratios) are higher.

That basically means that interest rates have to be lower for the same level of NGDP growth (and that's what the bond market is pricing in) otherwise you break corporates (which breaks employment) and potentially break the gov bond market. There is a solution that I allude to earlier, which is to allow NGDP growth to run hotter. But given that productivity or population growth is unlikely to change, that extra growth has to come from inflation. And that ultimately is bearish for the dollar because it means extra financial repression vs EU or Japan (more negative rate due the higher inflation). The US Dollar would be a worse reserve asset vs EUR/JPY/Gold/CNY, etc

So that's what I was missing, the fact that interest rates can be raised if NGDP growth were to run hot, is not bullish to the US dollar because that is actually the scenario where the Fed debases the money in order to delever the economy. The only alternative to this is to become like the EU where you have deflation/low inflation and an underperforming economy. Given the Fed's dual mandate and its aversion to deflation due the 1930's PTSD, I suspect they will prefer the inflationary solution. Especially given the quote I gave from Powell in the last press conference about the risks now being above 2%
I dont think these are factors at play in the near-term, near-term the US dollar could do anything but looking many years in the future, I suspect there will be less demand for the US dollar as a reserve asset and more demand for alternative currencies like EUR, JPY, AUD, CNY, Gold and even Bitcoin. And the cause of this shift is the never ending financial repression that the US is likely to face

A counteracting factor is that pretty much everyone else has a strong incentive to prevent the dollar from falling too much in order to maintain their current-account surpluses. As it is now, the US is the engine of the world economy - issuing dollars to pay for imports, which foreigners accept at somewhat overpriced levels in order to sustain domestic employment & export demand.

I think you need to disrupt this dynamic somehow to get a sustained downtrend in the USD, but if anything broader forces are pushing the opposite way - US demography is superior to the other big economies/blocs (from a purely economic POV) suggesting that American demand will become relatively even more important to those economies.

 

[tnatrader]

The fact that Joe Biden is president and the Powell is up for reappointment early next year also should be a factor. If Powell were to even hint at hawkishness he would be fired. Also, Biden will only appoint woky doves from now on (to the board of governors) so little by little the Fed will start to be tilted towards the inflationary side.
Its clear to me the average inflation target framework plus Powell's comment that the risks are no longer capped at the 2% ceilling is an effective increase in the inflation target and its uncertain how high the inflation target now is

This string of logic makes sense, but to play the devil's advocate, Biden can easily flip this if inflationary pressures were to get out of control. We've seen how much the media has played up this "transitory" inflation and Biden/Democrats in Congress can change their tune if they see that it's hurting their election chances. This seems to be playing out with the uptick in crime as Biden is now trying to be seen as being tougher on crime.

Source: https://www.bbc.com/news/world-us-canada-57589416

I read about a barbell approach 5 years ago and it still makes sense today as the Fed jiggering the economy fails to inspire confidence in me. My retirement accounts are 90% in risk assets, including commodities while my trading accounts have big cash piles conservatively selling puts and doing covered calls. Inflation seems to be the specter, but we've been talking about that for decades it seems like. Yields are still low and the market is still pricing in the probability of deflation, possibly via a Fed misstep. Both possibilities need to be respected imo.

 

[Daal]

A counteracting factor is that pretty much everyone else has a strong incentive to prevent the dollar from falling too much in order to maintain their current-account surpluses. As it is now, the US is the engine of the world economy - issuing dollars to pay for imports, which foreigners accept at somewhat overpriced levels in order to sustain domestic employment & export demand.

I think you need to disrupt this dynamic somehow to get a sustained downtrend in the USD, but if anything broader forces are pushing the opposite way - US demography is superior to the other big economies/blocs (from a purely economic POV) suggesting that American demand will become relatively even more important to those economies.

The trend already looks unfavorable to the USD:

The gainers have been the EUR, the JPY, CNY. Now that the Fed framework has changed making it more costly to hold reserves in the dollar, there is no reason for the trend to reverse. If anything it will probably accelarate especially given that China and the EU are pretty big importers and the USD "tax" has increased

For a country with lots of USD reserves the best thing they can do is to expand trade with the EU and China, they get to sell to big markets and diversify their holdings of FX reserves

 

[Daal]

This string of logic makes sense, but to play the devil's advocate, Biden can easily flip this if inflationary pressures were to get out of control. We've seen how much the media has played up this "transitory" inflation and Biden/Democrats in Congress can change their tune if they see that it's hurting their election chances. This seems to be playing out with the uptick in crime as Biden is now trying to be seen as being tougher on crime.

Source: https://www.bbc.com/news/world-us-canada-57589416

I read about a barbell approach 5 years ago and it still makes sense today as the Fed jiggering the economy fails to inspire confidence in me. My retirement accounts are 90% in risk assets, including commodities while my trading accounts have big cash piles conservatively selling puts and doing covered calls. Inflation seems to be the specter, but we've been talking about that for decades it seems like. Yields are still low and the market is still pricing in the probability of deflation, possibly via a Fed misstep. Both possibilities need to be respected imo.

Yes, I dont think they want too high inflation. They want the Dalio's "beautiful deleveraging". Powell wouldn't be able to have any credibility if inflation were to run out of control, but if it run at 3% that would be more defensible. Then they can change how they calculate inflation, change their preferred metrics and say they are on target. Meanwhile the real world nominal things are going up while debts aren't, so deleveraging

The means cash and bond holders are going to be continiously be taxed to pay for this deleveraging. And people will look for alternatives to these assets in order to avoid that tax

I just purchased more PSTH, I think a company like UMG is a great asset in a world where fiat is being debased

They own royalties on people streaming music (and in the future, buying NFTs) of the best artists in the world. That's a bussiness with a moat. Assets like this should become more in demand in the coming years

 

[Daal]

The Fed's has the perfect political cover (and pressure) to let inflation run hotter than normal due to:
-The average inflation target with the 'we gonna wing it' framework. They can always say 'we expect inflation to moderate next year', kinda like they are doing now
-The employment mandate. They always have to be worried about the business sector breaking and peopĺe losing jobs. They can be fired if they fail to achieve that mandate. Especially with Democrats in power. The ECB mandate seems different in that respect

 

[tnatrader]

I'm sounding like Bill Gross but who are these people buying Treasuries at these rates?!? Retooling the inflation metrics sound extremely plausible and have been happening for a while now like chained CPI etc, but bond buyers are for sure calculating the real "real" rates and sooner or later they must be requiring a higher return for their money.

I think it's highly likely that the American economy is so bifurcated that there is essentially two inflation stats. One for average middle/lower class Americans looking at food/shelter/gas and the wealthy who look at luxury goods/top ranked colleges/anything that is investable. If we chart those two things, all the printed money essentially went to the latter. There is some overlap with housing, but as far as food, clothing, electronics, inflation has been overall tame. It's really with the capital markets that we have seen the excesses of money printing.

Interesting you keep bringing up NFTs. I have always thought that they're a phenomenon of the rampant money printing and completely disregarded it as anything investable, but you may be changing my mind.

Yes, I dont think they want too high inflation. They want the Dalio's "beautiful deleveraging". Powell wouldn't be able to have any credibility if inflation were to run out of control, but if it run at 3% that would be more defensible. Then they can change how they calculate inflation, change their preferred metrics and say they are on target. Meanwhile the real world nominal things are going up while debts aren't, so deleveraging

The means cash and bond holders are going to be continiously be taxed to pay for this deleveraging. And people will look for alternatives to these assets in order to avoid that tax

I just purchased more PSTH, I think a company like UMG is a great asset in a world where fiat is being debased

They own royalties on people streaming music (and in the future, buying NFTs) of the best artists in the world. That's a bussiness with a moat. Assets like this should become more in demand in the coming years

 

[Daal]

I'm sounding like Bill Gross but who are these people buying Treasuries at these rates?!? Retooling the inflation metrics sound extremely plausible and have been happening for a while now like chained CPI etc, but bond buyers are for sure calculating the real "real" rates and sooner or later they must be requiring a higher return for their money.

I think it's highly likely that the American economy is so bifurcated that there is essentially two inflation stats. One for average middle/lower class Americans looking at food/shelter/gas and the wealthy who look at luxury goods/top ranked colleges/anything that is investable. If we chart those two things, all the printed money essentially went to the latter. There is some overlap with housing, but as far as food, clothing, electronics, inflation has been overall tame. It's really with the capital markets that we have seen the excesses of money printing.

Interesting you keep bringing up NFTs. I have always thought that they're a phenomenon of the rampant money printing and completely disregarded it as anything investable, but you may be changing my mind.

I agree with you on bonds, I dont understand the 30y UST bond yield. If anyone can explain to me why they trade there I would love to see it. The 10y/5y I get it, its financial repression but you would think 30Y investors would want more than what they get

As for NFTs, for the biggest fan of the say, Iron Maiden, to own an unique item associated with that band, its something that they would want to very much. Especially because not all NFTs are created equal, smart artists will do a better job than others (some will come with physical bonuses like vinyls or posters).
I mean, anyone can google the Monalisa and see it, so why does the original has so much value? The cost of looking it at is literally $0 (its a google image search), maybe $50 to own a perfect copy. So its a mental value and people enjoy owning things that are scarce. If they should or not doesnt really matter, they do and there is some opportunity. UMG I think is a interesting way because they will make money off issuance and sales, not by buying and holding the right ones, which is much more difficult

 

[Daal]

I'm sure there is an impact of monetary policy in all of this chasing of NFTs, as people are fleeing cash and devalued investments. But regardless, there is a sound fundamental reason for them (people like owning scarce things) as well as a tactical reason (financial repression by the Fed) so combined, it makes it a nobrainer to have some exposure