Jan 13, 2016. Skin in the Game
–Once again all near euro$ calendar spreads made new lows Tuesday as oil probed below $30/bbl before bouncing. Peak one-year spread is EDM16/M17 which fell 2.5 to only 42. There was heavy selling (90k) in EDH16/EDM16 at 10 to 9.5, settled 9.5. Open interest this morning appears to indicate a roll with March OI -23k and June +49k. But think of the absolute level! Just 9.5 bps for a three month spread in a tightening environment. Richmond Fed’s Lacker gave a speech yesterday with this line (at the core of his comments): “If oil prices bottom out and the value of the dollar peaks, but inflation does not soon move back toward 2 percent, a shallower path for interest rates would make sense. If inflation moves rapidly back toward 2 percent, however, a more aggressive path would be in order.” Quite meaningless. Sure, at some point the dollar may peak and oil may bottom, but even THEN you’re not going to have a sense of how inflation will move? By the way, besides euro$ calendar spreads falling, the ten year note to inflation index note yield spread edged to a new low of 145.7 bps, and the 5y5y inflation forward swap is likewise at a new low and the BBG Commodity index is at the low from 1999, and down 69% from the 2008 high. Markets are voting with an eye towards a more deflationary outlook.
–These latter points are contributing factors in high profile warnings from investors with what is commonly known as “skin in the game” (as opposed to random dot generators). First, RBS: “Andrew Roberts, the bank’s credit chief, said both global trade and loans are contracting, a nasty cocktail for corporate balance sheets and equity earnings, and uncharted waters given that debt ratios have reached record highs.” DoubleLine’s Gundlach has warned about the same sorts of issues and is calling 2016 a year for “capital preservation.” Perhaps this bounce in equities from oversold levels will bring calm back into the financial landscape. (My friend TS referred to it as ‘el gato muerte’). And hey leo, no ZH quotes today.
–Big sigh of relief as China’s export numbers were much better than the expected -8% and came in slightly positive. Well sure, the value of the currency is being slashed. It’s like the Joseph A Banks retailing model: Buy this pair of socks and get four suits free!! Look at all the merchandise moving through the door!! But competitors like S Korea and Japan are none too happy about it. Similarly, GBP has dropped 7% since October vs USD, from over 154 to a new low near 144. Sure, it will provide a boost to the UK economy, if the US consumer, upon which everything still seems to depend, holds up.
