Sept 2, 2018. Hunger Stones


In the current conditions, more than a dozen of the hunger stones can now be seen around Děčín, recording the low water levels of years and centuries long ago — “chiselled with the years of hardship and the initials of authors lost to history,” as described by the authors of a 2013 study on historic Czech droughts.

The oldest and most famous of these landmarks, known simply as “Hunger Rock” according to Děčín’s tourist guide, contains an inscription that dates back to 1616, which reads: “Wenn du mich siehst, dann weine” (If you see me, weep).

There were several articles in the past week about Hunger Stones, revealed in the Elbe River due to low water levels related to drought conditions.  The stone pictured above “…expressed that drought had brought a bad harvest, lack of food, high prices and hunger for poor people.”  A relic of an ancient time.  Now it’s a tourist draw.  The message however, cuts to the core for humanity, a signal of profound suffering and helplessness.  All that’s left is the crying.

Another ancient relic is gold.  A curiosity of a different era.  The framework of modern western civilization is founded on electronic impulses, communication, and constantly adapting supply chains.   The capitalist system adjusts for scarcity by price, incentivizing new supply or alternative products at relatively cheaper prices, thus filling the void.  Hunger?  Amazon will deliver today from Whole Foods.  We have governments to smooth out the rough spots.  For example, I remarked to a friend from trading floor days about the vicious decline in the price of soybeans from the early part of June.  He is from an agricultural heritage and told me the crop will be huge, but also sent me the USDA’s press release. ‘Details of Assistance for Farmers Impacted by Unjustified Retaliation’.   This program starts on Tuesday, September 4, and provides cash adjustments to farmers: $1.65/bushel for beans, $8.00/head for hogs, $0.14 bushel for wheat, etc.

Getting back to the price of gold, it has ranged from about $1140 to $1340/oz and is now near the lower end of that range.  It’s pretty much been sideways action since 2013.  Fairly low on drama.  However, consider the chart below:

That’s the chart of gold in terms of the Argentinian peso.  It makes for a much more compelling story when viewed by a guy in Buenos Aires, through the lens of economic mismanagement.  Obviously, Argentina is a unique case.  As is Brazil.  As is Turkey.  Etc.  For a broader perspective, the chart below is more appropriate:

That’s the price of gold in terms of the Illinois dollar, or rather in terms of the JPM EMFX index.  Not quite as meteoric of a rise.  But the ancient relic still might save a few tears.

I know it’s a poor, modern analogy to compare the omens on hunger stones to the US yield curve.  Using a chisel and a hammer on stone during famine isn’t quite the same as typing out a few inane lines on twitter.  However, we’re getting a lot of warnings about yield curve inversion and its implications for forward economic growth.  For example, Barrons this week has a piece titled ‘Will the flattening yield curve lead to recession?’  This essay notes “If the FF rate exceeds the two-year note rate, banks begin to tighten credit standards…[then] a recession ensues.”  It continues, “Unlike other yield curve measures, the spread between the FF rate and the 2-yr note actually has been widening since last summer.”

So the Fed effective, now at 1.92%, and the 2-yr note, now at 2.63%, are at a spread of 71 bps.  However, this spread will narrow significantly with the Fed’s expected hike on 26-Sept.  That’s likely to be the same case with the spread between the 3-month t-bill rate and the ten year, the curve measure favored by the SF Fed.   On the Eurodollar curve, the spread between reds (the second year forward) and greens (third year forward) has been negative for the past 16 sessions, and hasn’t been above +2 bps since the summer solstice.  The Eurodollar curve is unmistakably sending the message that growth is going to slow; that fiscal measures related to the tax cuts are going to wane in their effect on the economy.  The question is whether the message is correct.  Currently it appears as if a lot of supply chains are at risk of being disrupted.  Tightening of dollar rates is causing tears for countries that have recklessly borrowed in dollars.  The pain has spread to some areas of the global banking system.

Dollar denominated assets have provided refuge.  In some cases etf’s and other index products have masked relative weakness and vulnerabilities. However, risks are growing even in the US, especially in light of absolute levels of buoyancy. The curve reflects those forward risks.  When 2’s/10’s goes negative, weep?  No.  Weeping is for the depths of despair.  But lighten up on big tech.

This week brings ISM manufacturing (Tuesday) and Services (Thursday).  The employment report is Friday, with non-farm payrolls expected 190k.  As mentioned last week, the NFP report in September of last year was a large miss, coming in at only 156k.  In the ensuing week, the ten year yield traded to 2.06%.  By May of this year, the yield had surged over 100 bps to 3.09%.  Now we’re 2.85%.  Strong data this week would likely see only a limited increase in yields, while weak data has open space to the downside, especially if 2.78% doesn’t hold.

Posted on September 2, 2018 at 12:28 pm by alexmanzara · Permalink
In: Eurodollar Options

Leave a Reply