Argentina and the Locomotive

August 18, 2019 – Weekly comment

On Friday afternoon I decided to skip my traditional end of week beer downtown and caught the 4;30 commuter train north.  In Evanston, about three miles from my house, the train halted due to a pedestrian fatality on the tracks.  This was between stations, likely not an accident.

In this situation, between stations on elevated tracks, no one is allowed to exit the train until an investigation is completed.  This was announced both by conductors and over the PA system.  The conductor in my car said he had never heard of such an event taking less than two hours, and added that he understood everyone had things to do on Friday night, but that our hands were tied.  Shut down.  Can’t move.  Of course, that didn’t stop the guy behind me from pestering the conductor ten minutes later asking if he could get off, saying that he, perhaps unlike others, had alternative means of transportation.  As if many people on that particular train might not be quite as resourceful.  The conductor patiently explained the situation again.  Had I been the conductor, a second investigation would have had to be opened.

I decided to read a few articles. One, on ZeroHedge, talked about the true ramifications of the plunge in Argentine assets this week as Macri lost a primary election, signaling a shift back to socialist policies.  For those that missed it, the Merval Index covered the entire year’s range in one day, falling approximately 40% on Monday.  The Argentine Peso went from 45 to 62 per USD, ending the week around 55.  A friend asked me what I thought about the implications.  I was ambivalent, saying that it’s obviously happened there before, that the economy, at about $500 billion, isn’t all that large.  I regurgitated the surface stuff.  Just the kind of thing they said about subprime loans in 2007.  However, the larger implications are likely more along the lines of what Jimmy Rogers frequently says (paraphrasing):  ‘It’s hard to know the timing, but one event, which doesn’t seem all that significant, occurs.  Followed by another. And then another.  The fraying starts at the perimeter.”   Hong Kong, Baoshang Bank, H2O fund, Argentina.  Volatility spikes. The ZeroHedge  article’s summary warning, is, “get out of illiquid securities” drawing on a Bloomberg piece by Cormac Mullen who framed the issue as, “what happens when event risk meets illiquid markets.”  It’s like a locomotive meeting a pedestrian, and the subsequent CAN’T GET OUT OF MY POSITION.


Argentina is a poster child for the way investors were drawn to once-inconceivable assets by the hunt for yield. And in a world where algorithms and machine trading are replacing brokers and market makers, the inability to exit all but the most liquid positions smoothly has become an ever bigger risk – a liquidity breakdown was the biggest fear for quant investors in a JPMorgan survey in May.

Argentina was one event in an extremely important week. August of 2019 may be looked back upon as a critical month. Here are a few other thing that occurred.

  1. Argentina meltdown, downgraded to CCC by Fitch end of week
  2. Global yields plunge, with $17 T now at negative yields. US 10y -20 bps and 30y -25, sub 2%
  3. 2/10 briefly inverts.  Ten year inflation indexed note goes negative (0 real yield)
  4. Olli Rehn of the ECB governing council says big stimulus coming in Sept
  5. GE accused of accounting fraud.  DB makes new all time low.
  6. China credit numbers weak/ Hong Kong strains continue
  7. Trump…there are a lot of sub-points on Trump but I will just keep listing:
  8. …delays September tarrifs, previously announced without notice (capitulation)
  9. …allows companies to do business with Huawei
  10. …suggests that the US buy Greenland
  11. …admin late Friday announces that the US is exploring selling ultra-long dated bonds

Also worth adding, the relationship  between Japan and S Korea is deteriorating with President Moon Jae-in tweeting at the beginning of the month, “We will never again lose to Japan.”  Both Japan and S Korea removed each others preferential trade status at the start of the August.  Beijing is hosting foreign ministers next week from both countries in an effort to diffuse tensions.  India/Pakistan.  Russia’s doomsday weapon named Skyfall had a testing misfire which caused a nuclear incident.

The old “run on the banks” model, leading to a collapse in the financial architecture, has become passe.  However, the new and improved “run on the etfs” where instant liquidity is also assumed, may become a complicated twist in the market narrative.  The tsunami of buying in treasuries in August may, as much as anything, reflect the fear of illiquidity.  Of course, it’s also easy to justify on the basis of the US being a “high-yielder”, as the US share of investment grade yields is now 94% of the world.

This is a perfect week for the Kansas City Fed’s Jackson Hole Economic Symposium, ‘Challenges for Monetary Policy’ where Powell will present on Friday. From the ECB’s website, I see that Cœuré, Lane and Lautenschläger are scheduled to participate. As mentioned above, Olli Rehn, who sits on the ECB’s rate setting committee as governor of Finland’s central bank, may have preempted the theme: “When you’re working with financial markets, it’s often better to overshoot than undershoot, and better to have a very strong package of policy measures than to tinker.”  Shock and awe. 

Speaking of shock, the late Friday announcement that the treasury was considering selling 50 and 100 yr bonds caused a sell off of long maturities.  The ultra long bond (WNU9) settled at 3:00 pm EST at 195-23, and by the electronic close at 5:00pm was 194-14 having traded below 194 in the last hour.

I can’t help thinking about what White House meetings must be like.  “Mr President, the yield curve has inverted, often a sign of impending recession which is a risk to the stock market.”  “OK Munchkin, then UN-invert it.  Sell as many 100 year bonds as you can.  That should do it.”  Mr President, the Chinese are making inroads into securing natural resources in Africa.” “ Well then let’s buy Greenland.  It’s the same size, right?”  “Um, no sir.  It just appears that way on flat maps.” “Then offer them less.  Finance it with 100 year bonds.”  

It probably isn’t the greatest idea to re-introduce the idea of imperialist powers colonizing foreign lands.  Does that send a signal to China/Taiwan? Or to Russia, that it’s open season?  Perhaps this particular plan wasn’t completely thought through.  Similarly, the pullback of September tariffs may be seen as strengthening China’s hand.  Right out of the Trump playbook, China made some encouraging statements aboout upcoming trade talks.  But, in my opinion, China has only further cemented its position, and is less likely to budge given, for example, a newly approved sale of $8 billion in F-16 fighter jets to Taiwan.    


As I have mentioned I am long puts on HYG.  NOT A RECOMMENDATION, FOR ENTERTAINMENT PURPOSES ONLY.  The alleged GE accounting fraud outlined by Harry Markopolos got loads of press.  DB closed at a new low.  The BBB/Baa spread to treasuries has just violated a minor downtrend this week.  A twitter post from Trevor Noren, Aug 14, said  “In the 12 months ended March 31, S&P 500 firms spent 103.8% of their free cash flow on buybacks and dividends, which comes after spending 101.9% in 4Q18.  It is the first time since before the financial crisis that S&P 500 payouts have exceeded cash earned.”  Week to week change in HYG was small, from 86.25 to 86.10, with a minor break in between.  I continue to target 81.

8/9/2019 8/16/2019 4:30 EST chg
UST 2Y 162.6 147.6 149.1 -15.0
UST 5Y 156.0 141.2 142.3 -14.8
UST 10Y 173.3 153.9 155.9 -19.4
UST 30Y 224.6 199.9 203.5 -24.7
GERM 2Y -86.3 -91.1 -4.8
GERM 10Y -57.6 -68.5 -10.9
JPN 30Y 21.3 18.4 -2.9
EURO$ Z9/Z0 -45.5 -47.5 -2.0
EURO$ Z0/Z1 -2.5 -2.5 0.0
EUR 112.01 110.95 -1.06
CRUDE (1st cont) 54.37 54.81 0.44
SPX 2918.65 2888.68 -29.97
VIX 17.90 18.47 0.57

Posted on August 18, 2019 at 8:31 am by alexmanzara · Permalink
In: Eurodollar Options

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