Asymmetric Downside?: TIP Trade Update

Conclusion: Treasury Inflation Protection looks overvalued here, especially given the asymmetry associated with the long side of the USD. In fact, TIPS appear to have asymmetric downside risk, absent further monetary easing out of the Federal Reserve.

 

Position: Short the iShares Barclays TIPS Bond Fund (TIP).

 

This morning, Keith shorted the iShares Barclays TIPS Bond Fund in our Virtual Portfolio on the expectation that the demand for Treasury Inflation Protected Securities will wane in the coming months as the leading indicators for the slope of inflation (input costs in the form of energy, food, and raw materials prices) continue to make lower highs, consistent with our 1Q12 theme of Deflating the Inflation II.

 

As you recall, we took a brief respite from that theme immediately following Bernanke’s JAN 25thpledge to extend ZIRP to 2014, which we viewed as a headwind to our bullish view on King Dollar – the most notable of many factors driving commodity prices, in our opinion. Following a few weeks of taking the Fed’s queue and being bullish on assets correlated to inflation, we are now view the topping process in the Inflation Trade as a leading indicator for disinflation and, thus, are inclined to short TIPS.

 

Already broken from a TRADE-duration perspective, the TIP etf is flirting with a TREND-duration breakdown per our quantitative risk management model:

 

Asymmetric Downside?: TIP Trade Update - 1

 

We’ve made this point in previous notes, but absent a commensurate pickup in employment growth and wage inflation, accelerating input costs do little more than slow growth on a lag. While it can be nice to watch “risky assets” (equities, commodities, HY credit) all trade higher in unison and tell stories about accelerating demand/economic growth,  the reality of the situation remains is that we have a central bank that remains committed to perpetuating inflation due to a classical economic theory that views that as a prerequisite for employment growth.

 

Looking forward, however, the chart of the U.S. Dollar Index is telling us that from an intermediate-term TREND (bullish) and long-term TAIL (bullish) perspective, the current state of monetary policy backing the U.S.’s currency will come under increasing scrutiny and relegate Bernanke and Co. into an increasingly smaller box or, potentially, out of their roles altogether. Either way, further USD strength will have a negative effect on global commodity prices and assets that are highly correlated with inflation. The CRB Index (a basket of 19 commodities including crude oil) is breaking down and its quantitative setup inversely mirrors that of the DXY’s:

 

Asymmetric Downside?: TIP Trade Update - 2

 

Asymmetric Downside?: TIP Trade Update - 3

 

All told, Treasury Inflation Protection looks overvalued here, especially given the asymmetry associated with the long side of the USD. In fact, TIPS appear to have asymmetric downside risk, absent further monetary easing out of the Federal Reserve – which, in our view, poses a dramatic risk to U.S. growth, given that we’re already in the midst of an oil price shock!

 

Darius Dale

Senior Analyst


Premium insight

[UNLOCKED] Today's Daily Trading Ranges

“If I could only have one thing of the many things we have it would be my daily ranges." Hedgeye CEO Keith McCullough said recently.

read more


Cartoon of the Day: 'Biggest Tax Cut Ever'

President Donald Trump's economic team unveiled what he called last week, "the biggest tax cut we’ve ever had.” Before you get too excited about that hang on a sec. "Trump Tax Reform ain’t gettin’ done anytime soon," Hedgeye CEO Keith McCullough wrote in today's Early Look.

read more

Neurofinance: The Psychology Behind When To Sell A Bull Market

"Most momentum investors stay invested too long, under-reacting and holding tight after truly bad news finally arrives to break the trend," writes MarketPsych's Richard Peterson.

read more

Energy Stocks: Time to Buy the Dip? | $XLE

What the heck is happening in the Energy sector (XLE)? Energy stocks have trailed the S&P 500 by a whopping 15% in 2017. Before you buy the dip, here's what you need to know.

read more

Cartoon of the Day: Hard-Headed Bears

How's this for "hard data"? So far, 107 of 497 S&P 500 companies have reported aggregate sales and earnings growth of 4.4% and 13.2% respectively.

read more

Premium insight

McCullough [Uncensored]: When People Say ‘Everyone is Bullish, That’s Bulls@#t’

“You wonder why the performance of the hedge fund indices is so horrendous,” says Hedgeye CEO Keith McCullough, “they’re all doing the same thing, after the market moves. You shouldn’t be paid for that.”

read more

SECTOR SPOTLIGHT Replay | Healthcare Analyst Tom Tobin Today at 2:30PM ET

Tune in to this edition of Sector Spotlight with Healthcare analyst Tom Tobin and Healthcare Policy analyst Emily Evans.

read more

Ouchy!! Wall Street Consensus Hit By Epic Short Squeeze

In the latest example of what not to do with your portfolio, we have Wall Street consensus positioning...

read more

Cartoon of the Day: Bulls Leading the People

Investors rejoiced as centrist Emmanuel Macron edged out far-right Marine Le Pen in France's election day voting. European equities were up as much as 4.7% on the news.

read more

McCullough: ‘This Crazy Stat Drives Stock Market Bears Nuts’

If you’re short the stock market today, and your boss asks why is the Nasdaq at an all-time high, here’s the only honest answer: So far, Nasdaq company earnings are up 46% year-over-year.

read more

Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more