“The pendulum of the mind alternates between sense and nonsense, not between right and wrong.”
Commentary & Analysis
Do you like betting against one-way bets?
According to Bloomberg, positioning by specs in the long bond is the highest it has been in 10-years:
There are lots of good rationales for being long bonds:
- The US economy is slowing as seen in the 2s vs 10s yield spread tightening; i.e. the flattening of the yield curve. [US dollar index overlay is the purple line.] Thus, the Trump Reflation trade is dead and the completely revesal proves that, as you can see in the chart below.
- Inflation expectations are tumbling. Again this can be seen in a chart via Bloomberg below.
- The jury is still out on the Fed. They cannot afford to be aggressive with the US and global economy still sluggish and at the same time reduce the size of their balance sheet.
All of that makes a lot of sense. But, there are other rationales that suggest betting against his oneway bet may be worth the risk.
- Wave Chart Analysis – Speaks for itself I guess. Looking for a strong Wave [iii] on the expectation minor Wave [ii] is complete. [Note: Dollar Index overlay in red.] Key support at the swing low 2.165…critical support all the way back near 1.85 (but too much risk to take; risking to a close below 2.165 seems to make sense).
- To paraphrase Mr. Twain: Reports of the death of Trump tax and regulatory reform may be greatly exaggerated. Trump had a successful overseas trip. He gave the War Party what they wanted. Arms sales, Israeli love, and Iran hate. Maybe, magically, some of this Russia-gate stuff just goes away; and some of those reform ideas reappear on the docket. Never say never in the land of sheer power politics.
- The Fed makes it clear they will be doing “at least” two more hikes this year; and begin to trim their balance sheet at the same time.
- China, coming off their fresh downgrade by Moody’s (a US captive entity that seems to perpetuate itself despite proven incompetence and tacit corruption a la the Credit Crisis) decides it no longer needs to prop up its currency by holding such a huge supply of dollar reserves in the form of Treasuries and gets even busier selling them. This, coupled with negative sentiment about the Fed balance sheet, could possibly lead to something significant. Maybe our narrative is nonsense; nothing more than the usual “talking our book,” so to speak. However, we like the fact if we are wrong we know where our risk is. But if we are right, we don’t’ know how much our profit might be in this trade. We kind of like those types of bets.