(These are solely the views & opinions of KVP, & do not constitute any trade or investment recommendations. By the time you synthesize this, things may have changed.)
Macro Dragon: Oil on Fire, +$1.9 trn Fiscal Bill passes Senate & what if YCC is dead?
Top of Mind…
- TGIM & welcome to WK #11…
- Equity futures mixed Asia morning despite the $1.9 trn coronavirus relief package bill passing the senate over the wkd. The fact that it was a 50-49 all democrats for & all republicans against, suggest that congress still does not deserve to get paid a dime. They continue to consistently tow party lines, practicing tribalism & could not give two vaccines about the average American.
- Technically speaking, the bill (which had to be amended for the Dems to clear it without Rep support) goes back to the House on Tue, before POTUS can sign off on it.
- Its been a while since we have done some inversion on what seem to be currently consensus views & also as we all know in the case of YCC – a key component to the Dragon Leviathan Liquidity Regime Thesis!
- Lets just get right into it…
What if YCC control is dead?
- Pretty much since last summer, on the Dragon we’ve postulating that Abenomics/BoJ from Sep 2012, is pretty much where we are now in Bidenomics/Fed… & part of that pathway (given blackhole of debt, synthetic parameters & leverage in the system) includes other monetary measures such as YCC, buying debt & general financial repression
- There are at least two key risks to KVP’s thesis:
- One – just being flat out wrong & we are going back into a world of hawkish central bank policies & much higher rates to come, even with 10s at 1.585 (new highs on Fri to 1.6238%) & 30s at 2.30% (Fri highs of 2.3477%). That would also likely mean than fiscal policies are done, i.e. given the already large level of debt in the system (record deficit in the US coming).
- Two – too early… a multi-year global macro thesis, has a lot of moving parts & sequential events to the overall tide. So its not uncommon to run into counter pockets of smaller regimes, that seem to suggest that we’ve broken the broader meta regime of structurally lower yields & real rates being negative.
- Yet lets take a look at some of the arguments for why YCC will not happen:
- 1. Fed does not need to do it…
=>They are only concerned with short-term rates & in fact don’t mind the back end of the curve rising
=>US is printing +4% GDP & that's before we fully reopen, I.e. things are running hot
=>Signs of inflation abound in asset prices & last ISM paid prices being stratospherically high, 89
=>Fed & CBs, also tend to be reactive
- 2. YCC would Cement MMT & loosen the Kraken in the form of politicians who will spend, spend, spend with no accountability, transparency & optimization
- 3. YCC would decimate the USD, accelerating the structural decline of its world reserve status
=>Less influence the USD has globally, less influence US policy will have globally, plus less ‘pricing’/negotiating power
- 4. They’ll save all the bullets they can for the next big recession... as they have tapped a lot of the tool kit
- 5. With an economy that is running so hot, credit & HY can fail... I.e. very diff to underwrite the bond mkt in a liquidity event, than in an economy booming event
=>in fact this is a key structural tail risk that no one talks about, I.e. Powell & Yellen announcing in 2H21/2022 that they are not gonna be there to underwrite debt
- 6. Real rates are still negative, so why should they do YCC? “Chill bro & pass me another beer...”
- 7. Austerity is coming politically, we could only pass the latest $1.9trn fiscal stimulus through the senate with all the Dems on board – potentially puts further big fiscal infra spending plans on hold or at the very least, greatly diluted.
- 8. If they did YCC they are also in essence losing their independence as a CB, synthetically pricing their debt in the market really as a reaction function to fiscal policies
- 9. ‘You can never have negative rates in the US’, would be a disaster... that’s why they would not go down the YCC pathway...
- 10. UST 10s are going to break 1.65%, above which there is massive convexity due to mortgage re-hedging needs... I.e. if we break 1.65% it’s quick rerate to 2.00%...
- 11. YCC doesn’t really solve anything, all it does is exacerbate the structural holes, slippage, lack of accountability, lack of reform & modernization that is needed in the system
=>It delays the needed hard decisions by “our” policy makers & “leaders”
Rest of the Week & Other Reflections
- Oil is on fire, both literally & price wise as we are c. +2% on Brent & WTI this morning in Asia given the strikes at Saudi oil facilities – something that we have been through before. This brings YTD performance to a range of +36% to 39%.
- For even energy bulls like the Dragon, we continues to love the direction strategically (especially on equity & credit names – usual blue chip suspects we’ve been talking about since E-Sep 2020: XLE etf, XOM, WPL, BP/, etc), yet tactically remain wary of the one-sided velocity so far. At some point we are going to have a few strings of -5% to -10% corrections, before stabilizing – not sure what the trigger there will be, with the stimulus bill through the senate!
- Econ wise we got inflation out of the US, crude oil inv on Weds that more key given lvl of oil, Jols on Thu & PPI on Fri. China also has inflation, PPI, new loans & money supply. EZ will be revised GDP readings, jobs data, IP & regional CPI.
- CBs: rate decision out of Canada, Euro-Zone
- Bailey speaking on Mon 8 Mar, Lowe on Wed 10 Mar
- Hols: No major markets out.
- Dragon Interviews U-Tube Channel for easier play-ability… plus we got more on the way over the next two wks, as did new video shoots over the wkd.
-
New Dragon Interview– Global Macro & Nature Conservationist Geo Chen
Our third Dragon Interview takes us to an outlier’s outlier, with a world class trader & investor Geo Chen.
We had the pleasure of sitting down & speaking with Geo who is:
Board Member @ The Rain Forest Trust
Co-Founder of the Huang Chen Foundation [Nature Conservation Focus]
@geochen twitter channel
Whilst the interview was filmed at the tail-end of Nov 2020, there is something here for everyone to take something away, including bigger picture thoughts on 2021, broader implications of the macro regime that we are in, as well as overall framework, allocation & investment process.
Geo has been running his own capital across both liquid & illiquid strategies since 2017, chalking up world class returns in the process, which more importantly fuels Geo & his family’s passion & calling, for Nature Conservation.
What is impressive outside of the large returns over the period, is that Geo somehow does it all – from trading to investing, to internal capital allocations as well as external allocations across the entire asset class & strategies spectrum. I.e. its tough enough to consistently do well in one area, lets alone across the board.
We cover his come up story, his framework + process & approach, his passion & the importance of the Nature Conservation. Lastly we close with Top of Mind Thoughts & views for 2021 & the general global macro regime that we are in.
We hope you enjoy the interview, as much as we did putting it together. And if there is something that you take away from this, be it inspiration, enhanced framework, investment thesis that resonates, left you thinking, etc…
Do consider making a donation to the Rain Forest Trust – which buys up rainforest land around the world & maintains them within an ecosystem of local residents.
From a markets perspective these are some of the areas we touched on:
- How Geo fared in 2020, given the massive bullishness in Jan, crazy sell-off in Feb & Mar, then once again bullish recovery in Apr & May
- Inflationary regime & the huge fiscal forces that we are seeing
- Precious Metals & US duration
- Bitcoin & Crypto
- Energy
We hope you enjoyed this Dragon Interview, as much as we enjoyed putting it together
Previous Dragon Interviews
-
Start-End = Gratitude + Integrity + Vision + Tenacity | Process > Outcome | Sizing > Position.
This is The Way
Namaste,
KVP
