Taking a lap
December 31, 2023 -Weekly comment
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Another turn of the calendar. I was trying to come up with some sort of analogy and I kept coming back to memories of the old Eurodollar pit at 30 South Wacker. This was a huge complex, a large rectangular center jammed with locals and order-filling brokers and clerks, the option pit on the north end and the back months from reds forward tiered up on the opposite south end. Probably 250-275 feet in length. There were aisles around the perimeter, with trade checkers and runners going back and forth. On either side booths stacked up like a stadium, where desk brokers took phone orders from around the globe. I don’t even know how many people worked in the Eurodollar quadrant at its peak, maybe 1000? It’s not for everyone, but I loved that atmosphere.
This image is from the option pit looking south.
So what’s that got to do with the earth’s orbit around the sun? Not pictured in the image above is FO, a large filling broker in the option pit who had a menagerie of clerks and runners on his payroll, one of which was Frankie [Dion?] a wiry, scrawny kid from the south side with a shock of curly black hair and a big gap-toothed smile. I have no idea how he landed on the CME floor, he was the type who was in a million scrapes as a kid in the neighborhood, and thought everything was pretty funny, even the stories of when he got his own ass kicked. Anyway – and I think it was MRPH who instigated this – Frankie and his brother Spaz would have enthusiastic races around the pit, with requisite wagering among the spectators. (Yeah, ‘Spaz’. I sort of doubt it was his given Christian name though). As it relates to the trading year just passed, a lap around the pit came with many obstacles: people wandering around, floor security guards. I’m pretty sure some of these races also featured unraveling rolls of toilet paper on the runners, but that may well have been another stunt (apropos to 2023). Anyway, this year’s race has been run, the money has changed hands. Sadly, it’s just not quite as much fun anymore.
I jotted down a few themes for the start of the year, and of course failed to organize those ideas into any sort of comprehensive blueprint for the upcoming year (which never works anyway). But first I would like to note a couple of items from the end of October:
Perhaps one of the best calls of the year was Ackman saying he covered his bond short as tens were around 5% citing a slowing economy and a risk of being short with yields at new highs. That was October 23, 2023.
At essentially the same time on October 22, Senator Mitch McConnell was interviewed on Face the Nation and said this:
“If you look at the Ukraine assistance, let’s talk about where the money is really going. A significant portion of it is being spent in the US, in 38 different states. We’re replacing the weapons that we sent to Ukraine with more modern weapons. So, we’re rebuilding our industrial base. …No Americans are getting killed in Ukraine; we’re rebuilding our industrial base. The Ukrainians are destroying the army of one of our biggest rivals. I have a hard time finding anything wrong with that.”
https://www.youtube.com/shorts/slgsZnYnF3k
Though I personally agree that the US should be rebuilding our industrial base, I have a hard time finding much right about the rest of it. It’s like the financialization of the US economy. You can’t always expect a beneficial outcome without the risk of getting your own hands dirty.
In any case, it was right around this time, coinciding with the Nov 1 FOMC (no more hiking), that stocks and bonds started their historic two month sprint into year-end. As many have noted, going into the Nov FOMC, financial conditions were quite restrictive. That has now reversed into a massive relaxation. Ten-yr yield from 4.93% on Oct 31 to 3.80% Dec 27. SPX from 4194 on Oct 31 to 4781 Dec 27 (+14%).
The broader themes are the following:
The US Gov’t has continued to shift more (formerly) private activities onto its own ledger. Kevin Muir was recently interviewed by Adam Taggert on Thoughtful Money and emphasized the role of fiscal dominance in terms of pushing recession off the calendar. Given the upcoming election, the Federal Gov’t will likely continue the same agenda, perhaps with even more gusto. Attitudes like McConnell’s aren’t much of an impediment. And Mideast strife pours gas on the fire. I perceive the government as much less forceful in terms of a multiplier effect than private enterprise. Hangover’s gonna be a bitch.
The Taiwan election is January 13, pitting the DPP party which asserts independence from China vs the KMT party which is seen as more open to pro-China views. China’s economic data continues to show weakness; Mfg PMI data was just released at 49.0, near the low of the year. The Shanghai Shenzhen CSI 300 ended the year 18% lower than the high posted in January. The ten-year yield ended at 2.53% vs a high of 2.92% in February. If the DPP win, then risks of military confrontation increase. If not, then perhaps more peaceful domestic stimulus will occur. Either way, Xi has to lift the doldrums.
Bank of Japan meeting is Jan 22/23. There is likely no delicate way to end negative funding rates in Japan, though the removal of the 50 bp cap on the 10y JGB was accomplished without much of a broader reaction. High of the year in 10y was 95 bps in November, last at 61 bps. Possible withdrawal of Japanese funds invested in other western markets?
Q2 turmoil resulted from regional bank failures, accentuated by bond losses and deposit flight. Money Market Funds siphoned money away from banks as yields exploded. As Doug Noland notes, “One word we didn’t hear much from the Fed in 2023: ‘macro-prudential’.” It’s reported that money market funds now total around $6 trillion; the interest flows on that ($300b ?) go a long way in supporting consumption. Some analysts call it ‘money on the sidelines’ which will flow into stocks as the Fed begins to cut rates. I tend to look at it in a more perverse way, thinking that Asian yields may rise, and that as the Fed begins to cut short-end rates, curve steepeners will become popular, putting upward pressure on long bond yields. Fiscal deterioration will add to long-end weakness. As Torsten Slok of Apollo noted at the end of September, 31% of all US Gov’t debt outstanding, or $7.6t, matures within twelve months. Whether it’s called an increase in “term premium” or a fraying of confidence in the fiscal position of the US gov’t, I believe yields on 10s and 30s will exceed the highs of 2023. The chart below shows Fed’l Gov’t Interest Payments/ Current Tax receipts. A worrisome acceleration in the last two years to a 25 year high of 35%.
This year the ten-year yield ended at the starting point, just like Frankie and Spaz. Another visualization is the Fatboy Slim ‘Weapon of Choice video featuring Christoper Walken, “you could blow with this/you could blow with that” but wind up in the same chair at the end anyway….
For your listening pleasure I’ve also included a piece from Slim Harpo, ‘Scratch my Back’
| 12/22/2023 | 12/29/2023 | chg | ||
| UST 2Y | 429.0 | 426.0 | -3.0 | |
| UST 5Y | 388.5 | 385.0 | -3.5 | |
| UST 10Y | 390.6 | 388.0 | -2.6 | |
| UST 30Y | 405.8 | 403.0 | -2.8 | |
| GERM 2Y | 240.0 | 240.4 | 0.4 | |
| GERM 10Y | 196.5 | 202.4 | 5.9 | |
| JPN 20Y | 133.0 | 138.2 | 5.2 | |
| CHINA 10Y | 261.0 | 256.0 | -5.0 | |
| SOFR H4/H5 | -151.0 | -156.5 | -5.5 | |
| SOFR H5/H6 | -31.0 | -35.0 | -4.0 | |
| SOFR H6/H7 | 7.5 | 8.5 | 1.0 | |
| EUR | 110.14 | 110.38 | 0.24 | |
| CRUDE (CLG4) | 73.56 | 71.65 | -1.91 | |
| SPX | 4754.63 | 4769.83 | 15.20 | 0.3% |
| VIX | 13.03 | 12.45 | -0.58 | |
