“Red guards repeatedly forced him to renounce his own father.”
-Graham Allison
Is China “slowing” or “halting” its purchases of US Treasuries? Who is Xi Jinping? Would he sign off on that?
In one of the best historically grounded geopolitical strategy books of 2017, Destined For War, Graham Allison does a great job contextualizing where one of the most powerful people in the world is coming from.
|
“During what Xi describes as a ‘dystopian’ period of his life… when school closed, he spent days defending himself in street fights and stealing books from shuttered libraries to try to educate himself. Sent to the countryside by Mao to be ‘re-educated’ Xi found himself living in a cave in a rural village in Yan’an shoveling dung.” (pg 113) |
Back to the Global Macro Grind…
If you thought Trump was “unpopular” with establishment politicians in Washington, Xi Jinping was rejected the first 9 times that he tried to join the Chinese Communist Party!
In Xi’s own words he was “reborn”… “instead of committing suicide he chose to embrace the reality of the political jungle. He chose to survive by becoming redder than red.” (pg 114)
Do you think Trump, Treasuries, and Trade scares the guy? How about sustaining his political power? Do you think he’d “halt” purchases of US Government Bonds? Or is he going to threaten to? Slowing, halting, or tweeting is different than selling, obviously.
If you know someone who knows the answers to all of these questions, let me know. Because I don’t know.
What I do know is that on the heels of a big move in longer-term US Treasury Yields yesterday (shhh, do not tell the Macro Tourists who are still whining about the “yield curve flattening” that it steepened the curve), Global Bond Yields are moving this morning:
- German 10yr Bund Yields just popped +7 basis points, or +15%, to +0.53%
- Japanese 10yr Gov Bond Yields just ramped +4 basis points, or 100%, to +0.08%
In “risk on” space, when the standard deviation of “expected risk” is for something to move +/- 1 or 2 basis points, at most, in a day, a 4 basis point move is massive. The non-rate-of-change-absolutists will, of course, disagree.
This, fully loaded with the commensurate post-bond-yield-move rumors that both the BOJ and Chinese are changing their bond buying behavior (a call that has been putting “active manager” Macro Theorist PMs out of business for decades now) comes on the heels of:
- UST 10yr Yield rising +8 basis points, or +3%, yesterday to +2.56%
- And the UST Yield Spread (10s minus 2s) steepening from +52bps to +58bps wide
While in-the-moment Macro (or Macro Tourism) can be as exhilarating as riding the Zipper for 3 minutes at the town fair, what really matters in Global Macro Risk Management is contextualizing the immediate-term move within the intermediate-term TREND.
Why have US Treasury Yields on both the short and long end of the curve been rising since September 2017?
A) Oil’s Reflation (Bullish @Hedgeye TREND breakout signal in SEP)
B) Reflation Expectations bottoming in AUG 2017 then rising from SEP-DEC
C) US Growth Expectations continuing higher in the face of #accelerating cyclical and GDP data
Put simply, when both growth and reflation expectations are rising at the same time, bond yields rise. Period. That’s why timing Reflation’s Rollover II (vs. the epic one we saw from MAR-AUG of 2017) is going to be a subtle but critical risk management exercise.
Since selling the bounce in REITS (VNQ) in DEC (after UST 10yr Yield corrected from its then #overbought highs), thankfully I’ve been on the sidelines waiting and watching for the “reflation” component of this move in bond yields to get fully priced in.
Some of the last things on my Macro Catalyst Calendar (these things matter when it comes to timing) that should appear hawkish (or reflationary), sequentially, should be this week’s US Producer and Consumer Price reports for December.
I say some of the “last things” mainly because the base effects (compares) steepen, materially, in JAN and FEB… and since FEB inflation data isn’t reported until MAR, I have some time to be patient here.
Or at least I think I do…
I could, of course, be thinking about this the wrong way. That happens. Heck look at the guys and gals who came into 2018 short and/or underweight Tech and/or the SP500. There hasn’t been a DOWN day in the SP500 yet in 2018!
There’s being wrong on your timing. There’s being really wrong on your positioning. Then there’s being wrong on both AND either your politics or assuming you understand the politics those people running other countries!
Again, since I believe that literally anything can happen with the Chinese or Japanese, that doesn’t mean that I believe I have to constantly be positioned for everything and anything. Instead, I’ll just stick with my process at the top-end of my risk range in yields.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.43-2.56% (bullish)
SPX 2 (bullish)
NASDAQ 7043-7232 (bullish)
Biotech (IBB) 107-112 (bullish)
VIX 8.64-11.06 (bearish)
USD 91.22-93.05 (bearish)
EUR/USD 1.18-1.21 (bullish)
YEN 111.60-113.31 (neutral)
Oil (WTI) 59.32-63.51 (bullish)
Nat Gas 2.61-3.12 (bearish)
Gold 1 (bullish)
Copper 3.18-3.33 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
