Fed can't keep the rates low

[wabuffo]

Hypothetically?

 

 

I went long GLD Leap Calls @$150 in mid-April.

 

I'd wait until the Treasury general acct at the Fed gets down to $100b-$200b (or end of July) - whichever comes first and look to short something like TLT (so maybe TLT puts - medium duration of some sort).  Others have suggested shorting high-yield ETFs (not my expertise) since they would see a double-whammy of both rising Treasury rates and rising HY credit spreads.

 

If I'm feeling adventuresome - I'd short the junkiest of tech ETFs since their share prices should fall with rising discount rates (since any cash earnings, if there are any, would be way out in the future) when the TLT puts go on.  Maybe even short the Russell via puts.

 

But none of this is anything I might actually do since I'm a big chicken when it comes to both options and shorting.  I am comfortable with GLD and GLD calls since I think I understand that one well enough.

 

DO NOT DO ANYTHING THAT I AM DESCRIBING HERE - YOU WOULD BE A DEGENERATE GAMBLER IF YOU DID and BEN GRAHAM WOULD REVOKE ANY VALUE INVESTOR CREDENTIALS YOU MIGHT HAVE ... (I PROBABLY MAY NOT DO ANYTHING I'M DESCRIBING HERE - x GLD)

 

wabuffo

Edited June 9, 2021 by wabuffo

[stahleyp]

haha yes, hypothetically. After all, you might be wrong.

 

And by the way, thanks for the hypothetical thoughts. 

Edited June 9, 2021 by stahleyp

[muscleman]

18 minutes ago, stahleyp said:

haha yes, hypothetically. After all, you might be wrong.

 

And by the way, thanks for the hypothetical thoughts. 

+1.

 

[muscleman]

It almost feels magic to see this, while seeing 10-yr T-bill rate dropping at the same time. What wabuffo is saying is something I completely cannot understand, but it is working so far.

 

[maplevalue]

1 hour ago, muscleman said:

It almost feels magic to see this, while seeing 10-yr T-bill rate dropping at the same time.

 

Financial repression at it's finest. Cash is trash!

[Libs]

If this pans out, TLT July 30 $146 calls and SCHW July 30 $70 puts will be multi-baggers. 

 

Also, I'm developing a new theory.

1) Warren Buffett has mentioned making 50% annually on a small grubstake.

2) he's super competitive

3) With Stumpf disgraced, and all that bridge time freed up, he's active in this stuff to prove (1)

4)  He posts here for fun

 

(1-4) = Wabuffo is Warren Buffett.

 

Just sayin'.

[hasilp89]

1 hour ago, Libs said:

If this pans out, TLT July 30 $146 calls and SCHW July 30 $70 puts will be multi-baggers. 

 

Also, I'm developing a new theory.

1) Warren Buffett has mentioned making 50% annually on a small grubstake.

2) he's super competitive

3) With Stumpf disgraced, and all that bridge time freed up, he's active in this stuff to prove (1)

4)  He posts here for fun

 

(1-4) = Wabuffo is Warren Buffett.

 

Just sayin'.

 

I have actually been thinking this for a while and told another reader as much a few months back. The GTX registration statement may have disproved the theory but I'm holding out hope. 

 

https://www.ft.com/content/6f0d541d-3a47-481f-810b-d41dab13a2c2

 

 

 

 

 

 

 

 

[stahleyp]

Buying TLT July calls? He's saying to short TLT (hypothetically). What am I missing?

Edited June 11, 2021 by stahleyp

[Libs]

As Wabuffo put it:

<I think that there will be a big headfake on Treasury yields (first lower, then snapback higher).>

 

Look at the TLT recent price action. From 136 to 142 in a month. The calls expire 7/30. After that, theoretically, rates will go up again. 

[wabuffo]

Y'all shouldn't try to speculate on this stuff.  That is all.

 

wabuffo

 

 

 

 

[Libs]

5 hours ago, wabuffo said:

Y'all shouldn't try to speculate on this stuff.  That is all.

 

wabuffo

 

 

 

 

I know, but it's just for beer money, and completely irresistible: Everyone is (rightly) is baffled by yields dropping while we're getting 5% inflation prints; but it's been explained here on COBF that it's a temporary plumbing issue. There is no way I'm not getting some money down on this when 99% of the investing public has it wrong, and to boot, there is an end date  / target to track:

 

https://fsapps.fiscal.treasury.gov/dts/issues

 

We're at 633B as we speak.

Edited June 14, 2021 by Libs

[Spekulatius]

I agree with @Libs Nd of course @wabuffohere. It looks like yields are artificially compressed for treasuries because there are not enough treasuries issued right now because the federal reserve account bonds is slowly run down.

 

This sets up an interesting dynamic where despite inflation numbers being high and the economy running hot, the yields go lower. It is interesting from a trading perspective because many seem to draw the conclusion that the bond market “knows” that the inflation is a head fake and what we are seeing is just a result of a temporary supply Imbalance caused by monetary plumbing issues.

 

If this is correct there money to be made betting on higher interest rates (once the Fed account balance is run down). and probably betting on growth stock/ high multiple stocks going down as well, because if discount rates moving up again. We have already seen in March 2021 how this can work against growth equities.
 

It is an interesting thesis, but now one has to estimate the infliction Point which is when the Fed account balance reaches about $100B. Currently, we are at $633B which is probably worth about 1-2 month from now- I am guessing end of July when interest rate should start to move up again, if this hypothesis is correct.

 

It seems that TLT puts with an out of money strike and a year end expiration date would be a good way to play this. Either it works, or it doesn’t but it is an alternative hypothesis that I like because I think it is underpriced.

 

Any smarter way to play this? Puts on some growth stock index? ARKK?

 

Edited June 14, 2021 by Spekulatius

[Castanza]

23 minutes ago, Spekulatius said:

I agree with @Libs Nd of course @wabuffohere. It looks like yields are artificially compressed for treasuries because there are not enough treasuries issued right now because the federal reserve account bonds is slowly run down.

 

This sets up an interesting dynamic where despite inflation numbers being high and the economy running hot, the yields go lower. It is interesting from a trading perspective because many seem to draw the conclusion that the bond market “knows” that the inflation is a head fake and what we are seeing is just a result of a temporary supply Imbalance caused by monetary plumbing issues.

 

If this is correct there money to be made betting on higher interest rates (once the Fed account balance is run down). and probably betting on growth stock/ high multiple stocks going down as well, because if discount rates moving up again. We have already seen in March 2021 how this can work against growth equities.
 

It is an interesting thesis, but now one has to estimate the infliction Point which is when the Fed account balance reaches about $100B. Currently, we are at $633B which is probably worth about 1-2 month from now- I am guessing end of July when interest rate should start to move up again, if this hypothesis is correct.

 

It seems that TLT puts with an out of money strike and a year end expiration date would be a good way to play this. Either it works, or it doesn’t but it is an alternative hypothesis that I like because I think it is underpriced.

 

Any smarter way to play this? Puts on some growth stock index? ARKK?

 

You could opt for a 2x or 3x levered treasury

[Munger_Disciple]

David Rosenberg has a very different take on inflation & interest rates. He thinks rates will continue to go down & the current inflation is temporary. 

 

 

[wabuffo]

David Rosenberg has a very different take on inflation & interest rates. He thinks rates will continue to go down & the current inflation is temporary. 

 

https://www.zerohedge.com/markets/economist-david-rosenberg-says-bond-market-has-inflation-right

 

I think Rosenberg is one of the many macroeconomists getting faked out by the bond market right now.  His will be one of the exploding macroeconomists' heads come the fall.  

 

Of course, I have no idea whether inflation is transitory or not (I'm not sure) - but I believe his rate prediction will be proven wrong (at least after August 1st-ish).

 

wabuffo

Edited June 14, 2021 by wabuffo

[Munger_Disciple]

3 hours ago, wabuffo said:

I think Rosenberg is one of the many macroeconomists getting faked out by the bond market right now.  His will be one of the exploding macroeconomists' heads come the fall.  

 

Of course, I have no idea whether inflation is transitory or not (I'm not sure) - but I believe his rate prediction will be proven wrong (at least after August 1st-ish).

 

wabuffo

 

Just anecdotally, low inflation camp seems wrong to me. I live in CA and I see price increases everywhere including prices for goods I buy at Costco and I don't think the increases are transitory. For instance, how can increase in minimum wage be transitory? And we are also seeing big increases in skilled labor costs. Electrician charges $55 for trip cost and $85 per hour for work where I live. Plumbers routinely charge $100 per hour. These rates are much higher than what they were just 2-3 years ago.  In addition, we have seen huge inflation over the last decade in anything government touches (in the US): healthcare, education, residential real estate, local utility bills, etc. 

Edited June 14, 2021 by Munger_Disciple

[TwoCitiesCapital]

1 hour ago, Munger_Disciple said:

 

Just anecdotally, low inflation camp seems wrong to me. I live in CA and I see price increases everywhere including prices for goods I buy at Costco and I don't think the increases are transitory. For instance, how can increase in minimum wage be transitory? And we are also seeing big increases in skilled labor costs. Electrician charges $55 for trip cost and $85 per hour for work where I live. Plumbers routinely charge $100 per hour. These rates are much higher than what they were just 2-3 years ago.  In addition, we have seen huge inflation over the last decade in anything government touches (in the US): healthcare, education, residential real estate, local utility bills, etc. 

 

They can be transitory in that they only happen once. If we get 5% inflation for a year and then sub 2% inflation thereafter, then you're not getting 10-year yields much above 2%. 

 

Right now we're seeing large amount of inflation - much of it from a low base effect, supply disruptions, and trillions in direct stimulus. None of those is expected to last.

 

Higher minimum wage will persist, but if it doesn't go up at the same rate every year (it won't), then it can only support a lower and lower inflation rate going forward. 

 

IMO, we still have several disinflationary forces that are still in play that have been in play for decades: 

 

1) Demographics

2) Debt Loads

3) Technology/Innovation/Productivity

 

Demographics may flip to being neutral later this decade, but the other two are likely to persist and all 3 are still active now.  

 

As this plays out, maybe those factors change. Maybe we get trillion-plus dollar stimulus implemented every 9-12 months and I have to change opinions about it persisting. Or maybe something else happens on the global scale to continue to disrupt supply chains. Or maybe businesses have to continue to compete with unemployment benefits to hire workers and the labor market remains artificially tight. But I'm not currently convinced ANY of that will happen into 2022 which means after the one-time transitory impacts of higher prices in 2021, nominal prices will begin to revert to the sub-2% inflation mark we were seeing pre-pandemic.  

[Munger_Disciple]

TCC,

Why do you think inflation in the big ticket items like utility bills, real estate costs, skilled labor, healthcare & education are transitory? 

Edited June 14, 2021 by Munger_Disciple

[benchmark]

"junkiest of tech ETFs"

 

What are some example of these type of ETFs?

[Spekulatius]

5 hours ago, wabuffo said:

David Rosenberg has a very different take on inflation & interest rates. He thinks rates will continue to go down & the current inflation is temporary. 

 

https://www.zerohedge.com/markets/economist-david-rosenberg-says-bond-market-has-inflation-right

 

I think Rosenberg is one of the many macroeconomists getting faked out by the bond market right now.  His will be one of the exploding macroeconomists' heads come the fall.  

 

Of course, I have no idea whether inflation is transitory or not (I'm not sure) - but I believe his rate prediction will be proven wrong (at least after August 1st-ish).

 

wabuffo

Jamie would agree with you:

https://www.cnbc.com/2021/06/14/jamie-dimon-jpmorgan-is-hoarding-cash-because-very-good-chance-inflation-here-to-stay.html

 

He also understand the monetary pluming much better than said economist. Well if I had to chose one side argument, I think I would go along with the guy who bet's $500B on something (or at least the interest income from $500B).

[TwoCitiesCapital]

4 hours ago, Munger_Disciple said:

TCC,

Why do you think inflation in the big ticket items like utility bills, real estate costs, skilled labor, healthcare & education are transitory? 

 

Utility bills? Mine are mostly unchanged from the last year. 

 

Real estate costs? Most people buy real estate with debt. And while the price of real estate has gone up, the interest on the debt has come down. The net effect? Real estate is MORE affordable today (from a monthly payment stand point) than it was 1-2 years back. Even rents in many major cities are down. 

 

Skilled Labor? Do you have data to back this up? The primary rises in wages I've seen have been at the lower-end of the payment spectrum where it's directly in competition with gov't stimulus. As someone who works in finance, I'm not seeing exploding wages here. We'll see a rise in lower-end wages, but it will likely be a one-time effect. Also, the reduction in stimulus will likely offset much of the impact as incomes are reduced as stimulus is phased out. 

 

Healthcare and education have been massively inflationary for the past two decades even while overall inflation remained muted. I don't view their continued trend as the start of a new normal for inflation rates. We can debate as to the causes, but it's not stimulus or supply related. 

Edited June 14, 2021 by TwoCitiesCapital

[LearningMachine]

3 hours ago, Spekulatius said:

Jamie would agree with you:

https://www.cnbc.com/2021/06/14/jamie-dimon-jpmorgan-is-hoarding-cash-because-very-good-chance-inflation-here-to-stay.html

 

He also understand the monetary pluming much better than said economist. Well if I had to chose one side argument, I think I would go along with the guy who bet's $500B on something (or at least the interest income from $500B).

 

BAC also had "$450 billion in terms of our ability to fund loan growth or invest" as of April 15, 2021.  See https://app.tikr.com/stock/transcript?cid=19049&tid=2592914&ts=2251951&e=670919338&refCode=u8yosp#.  In the past, they have said they were ok with getting 10 bps while they wait for higher interest rate environment. 

 

Also, from BAC's clients perspective, "there's a lot of cash on the sidelines. And when you think about our business and the size of our business relative to the marketplace, I think it not only tells you where investors are, which is still maintaining some caution, which is as a contrarian, that's a bullish signal, makes me feel like we're not very late stage. And I think if you kind of gross up our kind of excess deposits or uninvested funds right now, that speaks to $1 trillion of buying power that could come into the market over the months ahead when client perspectives of risk do shift more meaningfully." See https://app.tikr.com/stock/transcript?cid=19049&tid=2592914&ts=2319413&e=717689992&refCode=u8yosp.

 

Wonder where clients will invest/spend that cash.

 

[Munger_Disciple]

18 hours ago, TwoCitiesCapital said:

 

Utility bills? ....

 

Real estate costs? ....

 

Skilled Labor?  ....

 

Healthcare and education have been massively inflationary.... 

 

I live in southern California. I think we live on different planets. As I mentioned in my earlier post, I see price increases in everything I use and buy but I am not an expert on macro economic issues. With that caveat, here is what I find where I live:

 

Utility Bills: Yes! Electrical utility bills have gone up roughly 6% per year for the past decade. Similar increases in water bills.

Real Estate Prices: Have you looked at them recently? I guess not.

Skilled Labor: Hourly rates are up roughly 30% from 2019 (if you can find someone).  

Healthcare & Education: I guess we agree on this. It is BS that they are not captured in the CPI.  

 

BTW congrats for the 0% inflation on your planet. 

Edited June 15, 2021 by Munger_Disciple

[Cigarbutt]

@Munger_Disciple

i don't really want to enter the debate (Inflation/deflation yada yada) but here's some potentially useful info.

The CPI is based on 8 groups, 2 of which are education (and communication) and medical care.

For wages, i've used the following and found it to be reliable:

Wage Growth Tracker - Federal Reserve Bank of Atlanta (atlantafed.org)

For housing, there are two aspects: consumer aspect and investment aspect. In the last 30 years or so, the investment aspect has become much more predominant (and more recently, in a more volatile way). So you have consumer inflation and asset inflation. As an individual (or a household), i guess you want a low housing consumer inflation aspect and high housing asset inflation aspect...

Anyways, your consumer inflation may be different (perhaps very significantly) from others and the CPI "measure" could be improved but it may be a useful starting point for a reflection. Anecdotally (and in a very irrelevant way), in the last few years, the consumer inflation that my household has been exposed to (consumer products, employees etc) has been very mild although we tend to notice when prices "jump" at times.

 

@LearningMachine

i don't really want to enter this debate among great minds but the cash-on-the-sideline thing is a tricky concept. Let's say i use my cash on the sideline to buy your VZ shares, then you have cash on the sideline. Even if i use margin cash, then i use cash on the sideline from someone else. The noise about all this growth in cash deposits is simply a reflection of expanding balance sheets (commercial banks, the Fed etc). For example, during 2020-1, corporates have built cash (for which they now face negative rates when they try to deposit at JPM or BAC) but the increase in cash was matched by revolver draws and debt issuance. Without entering the irrelevant question about the possible presence of systemic excess cash or excess debt, it's interesting to note that, during 2020-1, money market funds AUM increased by about 1T, of which all was channeled into short term government debt yielding essentially 0%. And since mid-March 2021, when MMFs call JPM and BAC, they are offered negative rates so they have turned to the reverse repo market and bought more than 500B of short-term repo collateral (short term government debt) in exchange for cash and a 0% (or slightly negative yield). i guess the opportunity cost is about 0% for cash on the sideline. Anyways, whatever your perspective on this wave of liquidity waiting to stir animal spirits, you have to reconcile with the following recent asset allocation profile prepared by Ned Davis (excellent data). Some conclusions from the graphs appear counter-intuitive but it's not fake news and it all makes sense if you actually go through the numbers.

 

 

[PJM]

@wabuffo Since the economy is bouncing back sharply with expected GDP growth of >6% this will lead of huge tax receipts for the US treasury. In the absence of any new stimulus package by the govt, do we expect reduced deficit spending and in turn lower issuance of Treasury securities by the the US treasury even after bringing down the Treasury balance back to ~$117.6b? Since a growing economy needs more govt bonds, wouldn't that continue to put pressure on the bond yields with higher demand and lower issuance of the securities? In that case, why do you expect the yields to jump up post August? 

 

Second, according to Jamie Dimon, the FED will have to increase the rates due to inflation, and thats why JPM is keeping high cash balance as they expect to deploy into higher yielding assets. When and why do you think will Fed increase the rates? IF i understood correct, you believe that there wont be inflation just because there is QE and that the fed can continue to keep rates low. 

Edited June 15, 2021 by PJM