US economy is fine. US stocks, all-time highs. China and election are wildcards.
Goldilocks chases away Bigfoot
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NFP slammed the bond bulls and now the momentum has turned. The narrative in August was that the Bigfoot recession* had finally been spotted, but once again he/she disappeared back into the woods, leaving the Goldilocks economy safe and sound.
*It’s called the Bigfoot recession because many have claimed to see it in recent years, but the empirical evidence shows clearly that it does not exist in real life. Manoj Ramnani came up with the term.
Now, the new narrative is bottoming inflation, 3.2% GDP growth in the US, a healthy job market, and a Trump win that would deliver more MMT-style fiscal stimulus in the midst of a Goldilocks expansion.
At The Grant’s Conference, Stan Druckenmiller said:
‘You know, if Trump gets elected, we have the possibility of tariffs. We have the possibility of immigration slowing down, which will restrict the labor supply. We have the possibility of animal spirits from regulation coming down. And GDP is already growing at 3%.”
And Greg Ip at the WSJ went with this headline:
This is far from the cataclysmic pricing and narrative just eight short weeks ago.
Taking a look at inflation… You can see that the YoY story has stopped improving and inflation has based well above 3.0% on CPI and closer to 2.7% on Core PCE. Supercore CPI continues to inflate around 4% per year, the same place it was in mid-2023.
We are out of the inflationary explosion caused by the supply shock after COVID, but we’re still in the midst of non-trivial price rises. In fact, Supercore CPI is higher than it was in 2021.
And there is just about zero risk premium for another MMT-style money drop like we saw from Trump in 2017. This has bond markets pondering what’s next as the odds of a Red Sweep rise.
Larger US deficits, less immigration, and more tariffs would all lead to higher inflation in the US and it’s not like 2016 where we were coming off a low base. When Trump was inaugurated in January 2017, inflation data was 100bps lower across the board.
It is worth pointing out here: While everyone says the Trump policies will be inflationary, those exact policies were not particularly inflationary last time he was President. Inflation oscillated up and down pretty randomly in a tight range when DJT held office, despite tariffs, slower immigration, and unorthodox MMT-style fiscal stimulus at the peak of an expansion.
For now, though, I am more concerned with understanding the common knowledge reactions to the various election outcomes, not with forecasting actual policy or economic outcomes into 2025 and beyond.
The consensus / common knowledge is as follows:
Outside the US, we eagerly await a China stimulus announcement tonight (10:00 a.m. Saturday in Beijing). Here’s what I wrote in am/FX regarding expectations for the event.
The big weekend announcement is coming. Here is what Bloomberg has for expectations. This chart makes sense based on what I have read. There is, of course, some importance to the composition of the stimulus, but that is too complicated to gameplan coherently.
Based on recent volatility around China news, These are my estimates for what AUD and NZD will do over the weekend, based on various outcomes.
If the Ministry of Finance does not offer up a firm figure, that’s the most confusing outcome because then you can then suppose the big reflation dream continues, and we can still wait for some gargantuan announcement later in the month once the NPC Standing Committee meets.
So, my estimates for “no figure given” are the most uncertain because I’m honestly not sure if the market will just roll the hopes and dreams further out into October if the MOF doesn’t give a specific number tonight. Thus, a specific number $1T or lower is the most clearly bad outcome as it would leave nothing left to play for and cause bulls to fully spew.
When thinking of these numbers in context, it’s useful to know that the Chinese real estate market is the largest asset class in the world and has dropped in value by something like 70T yuan or maybe 140T, depending on who you ask.
If you want some more global macro learnings, you can read a free am/FX from this week right here.
https://www.spectramarkets.com/amfx/preparation-meet-opportunity/
That piece references the super-sexy 2025 Spectra Markets Trader Handbook and Almanac, currently trending on Amazon.
Buy the 2025 Spectra Markets Trader Handbook and Almanac here.
China stocks remain the focus as the US stock market continues its boring and monotonous march to new all-time highs. I have emphasized that it’s useful to think of the Chinese stock market less as a reflection of economic activity or earnings in China, and more like a memestock or shitcoin. Here’s what normal stock markets have done since 2011.
Note that the DAX is a total-return index, while the other indices are price return indexes, but either way, you see what a “normal” stock market looks like.
In contrast, here is the Shanghai Composite Index. Note there has been no positive drift. The market languishes, then spikes, then reverts toward an unchanged baseline. It trades up and down through a flat line average.
This is reminiscent of how things like dogecoin and GME trade.
While the cliché is that the US stock market is not the economy, that is true times fifty in China. The stock markets there are more a speculative barometer, with a bit of “we-like-or-don’t-like-capitalist-characteristics -billionaires-gonna-go-to-jail-etc” risk premium going up and down. The idea that a share of stock in the US gives you title to some future stream of earnings is already rather abstract. It’s full-on Daliesque in China.
Here is this week’s 14-word stock market summary:
US economy is fine. US stocks, all-time highs. China and election are wildcards.
No recession here
The bond bulls scramble away
Narrative shifts fast
The Fed communicated low confidence that the 50bp cut in September was the right move and now you have guys like Bostic saying November might be a skip. NFP came in roaring. Trump odds are moving higher. Bond bears hit the trifecta in the past 10 days as everything that bond bulls thought they knew proved incorrect.
That said, we are about to bump against major trendline resistance in yields at 4.15% and then above that there is the last major high before the August yield crap out at 4.50%.
The chart and the newly embraced short bonds narrative suggest to me that we consolidate next week. I would guess 3.90%/4.18% kinda thing. There isn’t much juice on the US economic calendar, other than Waller and Retail Sales, so it would probably take something ginormous from China to get yields through 4.20%. We have done enough work now, and bonds should take a rest for a bit.
The ECB announces their interest rate decision next week, and I expect that one to be boring as the 25bp cut is fully priced and there is no incentive for them to precommit from here.
The chart of the DXY looks identical to that chart of 10-year yields up there as interest rate differentials do their thing. There was a brief moment where EURUSD decoupled from interest rates after the China stimulus announcement (and that jiggled me out of my short EURUSD position, fml). In the end, rate spreads usually win.
Other than the rip-roaring USD, another story in fiat land this week was some unexplained weakness in the CAD. The currency of the Great White North had been performing pretty well for a while as short CAD positions unwound in the first two weeks of September, but the loon has been unceremoniously fish-hooked without any particularly strong idiosyncratic macro narrative.
This week, speculation is that a large M&A (see here) is pushing the loon underwater. Large cross-border deals that are done in cash can trigger huge foreign exchange transactions and those transactions can sometimes take days to go through. When the transaction is done, the currency tends to mean revert, but timing the end of the flow is notoriously tricky. As a rule, hedgers of deals like this tend to be human beings so if you think about the preferences of a normal human being (let’s get it done by the weekend, let’s get it done before the data comes out, etc.) … You can sometimes make educated guesses.
My educated guess is that ahead of a US holiday weekend, there is a great likelihood that this flow is done by 5 p.m. today. $6.5 billion is a decent-sized flow in USDCAD, but it isn’t something that should take more than a few days.
When there is a big USD move, and you want to know how a particular currency is doing relative to other currencies (but not relative to the dollar), there are two ways you can check. One is to look at a trade-weighted index. That’s what economists would do. Traders and investors generally look at a series of major crosses to see how, for example, CAD is performing. E.g., if EURCAD, AUDCAD, and GBPCAD are all higher, CAD is weak.
Or you can use the WCRS function on Bloomberg. It gives this for currency performance vs. USD this week.
Impressive performance by AUD, considering the disappointing lack of detailed news flow on China this week.
By the way, if you’re interested in learning more about trading currencies, my book, The Art of Currency Trading, gets high ratings on Amazon. Of all the books I have written, it’s my fourth favorite, but people still like it! It definitely does one specific job well (teach about FX markets).
Crypto is stuck between narratives still as the institutional adoption story is boring, halving is priced in, price action is choppy and directionless, and the HBO documentary came and went without anything exciting.
Maybe the best thing to happen to the crypto space in the last few months is the rising activity on Polymarket. Into the election, that site is getting tons of attention. It’s a crypto-based gambling website that offers odds on many, many different outcomes.
Wanna bet on US elections? You got it. Highest grossing movie of 2024? Sure. Ohio Senate election winner? Why not!
You could have even bet on whether Strawberry Gummy is a man or a woman. That one settled at 50/50, natch.
Crypto is interesting.
The other big story in crypto is the widening premium of MSTR vs. BTC as the long BTC / short MSTR trade unwinds. Anyone that remembers the Palm spinoff or the non-sensical GBTC premium and discount or the Porsche/VW short squeeze or any one of the many other crazy disconnects over the years knows that these things are not arbs. They’re bets. Bets that can go horribly wrong. To paraphrase Benjamin Graham:
In the long run the market is a fair value machine, and in the short run it’s a gambling and pain-delivery machine.
To paraphrase Keynes:
Market value vs. fair value can widen longer than you can stay solvent.
There is no reason MSTR can’t trade at 0.5X or 3.5X or 9.5X “fair value”. There is no imminent crystallizing or catalyzing event that will deliver a return to sanity. Now that we are through the double top at $200—anything can happen. This is not to say that these mean reversion to fair value trades are not good trades—they are amazing trades. But they are almost impossible to time and almost impossible to risk manage. Achtung, baby.
The impressive performance by gold continues, and the other commodities are hanging in there, too. Most commodities are close to unchanged this week, with choppy action but little direction.
You can see that oil broke the bottom of the range ($72) in early September, failed to recapture it mid-September, and has now got its head back above that waterline despite bearish Saudi utterances. If China can somehow summon a bit of a reflationary vibe this weekend, oil could be off to the races for a bit. I love to hate crude, but I can’t right now. It trades pretty well. I would take $80 before $70 at even odds.
Whew! OK! That was 11.4 minutes. Thanks for reading Friday Speedrun.
Get rich or have fun trying.
Is it over yet?
“It was a bright cold day in April, and the clocks were striking thirteen.”
George Orwell, 1984
In preparation for the endless series of deranged theories you are likely to see on Twitter this weekend, two quotes. The first is from Hannah Arendt, and the second from Carl Sagan (via Mike Green).
“In an ever-changing, incomprehensible world the masses had reached the point where they would, at the same time, believe everything and nothing, think that everything was possible and that nothing was true. … Mass propaganda discovered that its audience was ready at all times to believe the worst, no matter how absurd, and did not particularly object to being deceived because it held every statement to be a lie anyhow. The totalitarian mass leaders based their propaganda on the correct psychological assumption that, under such conditions, one could make people believe the most fantastic statements one day, and trust that if the next day they were given irrefutable proof of their falsehood, they would take refuge in cynicism; instead of deserting the leaders who had lied to them, they would protest that they had known all along that the statement was a lie and would admire the leaders for their superior tactical cleverness.”
― Hannah Arendt
“I have a foreboding of an America in my children’s or grandchildren’s time — when the United States is a service and information economy; when nearly all the manufacturing industries have slipped away to other countries; when awesome technological powers are in the hands of a very few, and no one representing the public interest can even grasp the issues; when the people have lost the ability to set their own agendas or knowledgeably question those in authority; when, clutching our crystals and nervously consulting our horoscopes, our critical faculties in decline, unable to distinguish between what feels good and what’s true, we slide, almost without noticing, back into superstition and darkness.”
― Carl Sagan
“Everything faded away into a shadow-world in which, finally, even the date of the year had become uncertain.”
George Orwell, 1984
Music
Staying on topic, let’s enjoy three great songs about the coming apocalypse.
And some say the end is near
Some say we’ll see Armageddon soon
I certainly hope we will
I sure could use a vacation from this
Stupid shit, silly shit, stupid shit
One great big festering neon distraction
I’ve a suggestion to keep you all occupied
Learn to swim, learn to swim, learn to swim
Phoebe Bridgers: I know the end
Windows down, heater on
Big bolts of lightning hanging low
Over the coast, everyone’s convinced
It’s a government drone or an alien spaceship
Either way, we’re not alone
I’ll find a new place to be from
A haunted house with a picket fence
To float around and ghost my friends
No, I’m not afraid to disappear
The billboard said, “The end is near”
I turned around, there was nothing there
Yeah, I guess the end is here
The end is here.
The surgeon general’s pop-up shop, Robert Iger’s face
Discount Etsy agitprop, Bugles’ take on race
Female Colonel Sanders, easy answers, civil war
The whole world at your fingertips, the ocean at your door
The live-action Lion King, the Pepsi Halftime Show
Twenty-thousand years of this, seven more to go
Carpool Karaoke, Steve Aoki, Logan Paul
A gift shop at the gun range, a mass shooting at the mall
There it is again, that funny feeling
That funny feeling
There it is again, that funny feeling
That funny feeling
Full agoraphobic, losing focus, cover blown
A book on getting better hand-delivered by a drone
Total disassociation, fully out your mind
Googling “derealization”, hating what you find
That unapparent summer air in early fall
The quiet comprehending of the ending of it all
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Trudeau resigning is probably bullish CAD. Scaled tariffs are probably bearish USD.
Lot of strange things going on. Feels like a bit too much leverage out there.
