Current positions 6/18

Follow me on Twitter where I give real time commentary on the markets in between posts. This blog is not meant to be a trade signaling service, nor is it financial advice.

If you’ve been reading my inflation series you’ll know my view that global inflation will continue climbing higher than policy makers think, and that it will take more tightening and economic weakness to get inflation back down. Historically, inflation (when above 5%) has not come down on its own accord without the Fed tightening Fed Funds rate above CPI.

All of my positions are an expression of this view on inflation. All central banks are behind the curve, but some are more behind the curve than others.

Jonathan Ferro @FerroTV

Fed: Hikes 75bps SNB: Hikes 50bps BoE: Hikes 25bps ECB: A plan to make a plan BoJ: Operation ostrich

The best way to express this view in my opinion is by being short front end rates and bonds (betting on more aggressive rate hikes). While this may be obvious to some people, many in the market are overthinking this and believe there is a limit to how aggressively central banks can hike rates. Their argument is that aggressive rate hikes would send economies into recession and cause dislocation in the financial markets. I do agree that will happen down the line, but we are a few months to a couple quarters away from this being the main concern for central banks.

Short JGB futures

This is the trade I’m most excited about because it’s the market where reality is the most out of line with fundamentals, and therefore the return profile should be pretty asymmetric. The Bank of Japan is keeping 10 yr JGB yields capped at 0.25% by buying an unlimited amount of bonds to defend that level. This makes it the most dovish central bank in the world. The yen has been weakening a lot as a result, making imports (esp energy) more expensive, and the large number of bonds being purchased is keeping financial conditions very loose.

The JGB bond market doesn’t think the BoJ’s 25 bp yield is credible or sustainable, and has therefore been hitting the bid aggressively all week. Nothing is ever 100% certain, but it feels like there is only one direction yields can go, and that is up. The last inflation print was 2.5%, but that was the April number (which came out in late May). We’ll get the May number next Friday, and it could be a zinger. Maybe it’ll convince the BoJ that inflation is a problem that needs to be addressed. If the BoJ lifts the cap, they might reset it to 50-75 bp, and I wouldn’t be surprised if the market gaps there quickly.

Short June 2023 euribor futures and German 2 yr Schatz futures

I discussed this trade in my June 9 post and I think it is still in the beginning stages of playing out. The market is pricing in only 2.75% in hikes by the ECB (from a starting point of -0.50%) while inflation is going to reach double digits by the end of the year. At some point this year I think the ECB will start panicking about inflation and start hiking in chunks of 50-100 bp.

Long 5 yr Treasury puts (108 strike expiring Aug 26)

I originally had 10 yr Treasury puts (first mentioned on Jun 9) but I swapped them out for 5 yr because I think the shorter end of the curve will lead as the Fed gets more aggressive with its hikes. I believe Fed funds will exceed 5% at some point in this cycle.

Long Nasdaq puts (11k strike expiring Sept 16)

First mentioned in the June 9 post. Lower equities will be a natural by-product of higher yields and QT. I wouldn’t be surprised if Nasdaq draws down 50% from the high in this cycle. The worst has yet to come for the equity market.

Long WTI

I stopped out of this trade for a 5$ loss today on the sharp selloff in oil. I’ll revisit going long Brent or US gasoline futures if the market settles down.

Long Natural Gas and Soybeans

Small positions to get additional energy and soft commodities exposure

Short ETH/BTC

Took profit for a 13% gain. BTC and ETH both reached my downside targets so I’m expecting this cross to stabilize at current levels along with the broader crypto market.

Disclaimer:

The content of this blog is provided for informational and educational purposes only and should not be construed as professional financial advice, investment recommendations, or a solicitation to buy or sell any securities or instruments.

The author of this blog is not a registered investment advisor, financial planner, or tax professional. The information presented on this blog is based on personal research and experience, and should not be considered as personalized investment advice. Any investment or trading decisions you make based on the content of this blog are at your own risk.

Past performance is not indicative of future results. All investments carry the risk of loss, and there is no guarantee that any trade or strategy discussed in this blog will be profitable or suitable for your specific situation. The author of this blog disclaims any and all liability relating to any actions taken or not taken based on the content of this blog. The author of this blog is not responsible for any losses, damages, or liabilities that may arise from the use or misuse of the information provided.