Trade Alert: 2.13.18

Trade Alert: Let's Make A Small Bet On Hot CPI


Dear Subscriber,

Quick note ...sorry for lateness but having a wee snow blizzard here in the Tahoe Foothills our winter outpost and lost power for a bit.

The equities markets ARE obviously doing what I talked about in our last update: Repricing risk assets and volatility levels for new information on inflation and interest rate curve risk.

For those of you who like to do some hedging of risk into a "hot CPI print" that would undoubted rekindle the fears of a more aggressive Fed I'm going do a 1/2 full $1000 instead of our usual $10,000 tranche ahead of the 8:30 pre-market CPI numbers and revisions Wednesday Morning the 14th. 
Action: This is a TRADE $263 March 2 S&P 500 PUT OPTIONS $3.40 or BETTER--just to exercise our new volatility muscles. 

Look...I am not calling the end of this secular bull market at all. Our Transformity Macro Market is a bullish as its ever been for NO RECESSION in the next 4-6 months. The much needed correction was much needed as I talked about last week simply to pop the bubble of insane exuberance that washed into the already hot market starting with $50 billion of new money from retail investors in the first two weeks of January mostly in index funds. 

The meltdown over the 3% year-over-year average wages paid in January spooked the bond market and the 2.85% 10-year bond crash spooked the equity traders. In turn...the $250-$500 billion of low volatility derivatives exposure blew up and the short covering and margin call cashiering dumped a ton of cap weighted S&P 500 stocks onto a stock market where the short term algorithme and trend following Commodity Trading Pool Advisors (CTA) players read Volatility and Trend traders pulled their market bids and dumped risk.

Market Mechanics then set in: the HUGE multi-trillion index funds rebalance at 3:45 and automated selling created crushed closings and then huge swooshes up at the EOD. Look for another swoosh today.
investors in both the stock and bond markets have yet to grasp the longer-term implications of mind-boggling deficits and an onerous, permanent debt burden. It’s no longer a question of “whether” the massive debt will start to squeeze the economy; the only issue is when, and how we’re going to manage it.

Ironically—and many commentators already have pointed this out—this comes when Republicans control the White House and both houses of Congress.

The same people who came to power railing against the debt built up under a Democratic administration—including our sitting president, who on the campaign trail repeatedly blamed the nation’s economic woes on the $9 trillion President Obama added all by himself to the national debt (although every penny had to be allocated by a mostly Republican Congress)—are now enthusiastically digging us deeper into the fiscal ditch.

Last week’s spending bill was just the lime on the margarita glass. It authorized $320 billion in net new military and domestic spending over the next 10 years, essentially ending the spending caps put into place under the Budget Control Act of 2011. For that, it delayed a government shutdown for two years, well beyond the be-all-and-end-all midterm elections.

That comes on the heels of the tax cut Republicans tout as their crowning achievement. That law, the nonpartisan Committee for a Responsible Federal Budget (CRFB) estimates, would add $1.5 trillion to the national debt over the next decade. CRFB projects the tax cuts and new spending spree would push our annual deficit to $1.2 trillion in fiscal 2019, which begins in October.

Furthermore, given Washington’s penchant to make “temporary” spending permanent, CRFB projects the tax cuts and budget deal will result in $2 trillion-plus annual deficits by 2027. That same year, federal debt owned by the public could reach 109% of GDP, from around 75% now. That would be higher than the previous peak at the end of World War II.

It also would reverse years of real progress. A growing economy and spending constraints under the Budget Control Act (the dreaded “sequester”), which President Obama signed to end the debt-ceiling crisis of 2011, caused the annual deficit to plunge by two-thirds, from $1.4 trillion in fiscal 2009 to $439 billion in fiscal 2015.

Since then, Congress has been trying to wiggle out of the sequester’s restrictions, and the deficit has edged up, but the latest tax cuts and spending bills have thrown all restraint out the window.

Now under two successive Republican presidents (George W. Bush and Donald J. Trump), a GOP-run Congress ballooned the debt and deficits, with several big tax cuts and an estimated $5 trillion in total spending on losing wars in Iraq and Afghanistan. (Obama and the Democrats, whom we know are fiscally responsible, dug us deeper in the hole with the stimulus and other spending bills during and after the Great Recession, as well as continuing Bush-era policies.)

So, now, we’re faced with gigantic deficits and debt eight years into an economic recovery. What will happen when the next recession hits and tax receipts plummet? Will rates have to rise to get investors to buy Treasurys to finance the U.S. government, even as the economy sinks? Will the higher interest costs put the country even deeper in the hole? And what about Medicare and Social Security, which already have serious long-term funding issues? That’s likely to set off an epic political battle that makes our current divisions look like peace and harmony.

How will investors react when all that shit hits the fan? Not well. Once it sinks in that our debt problems are here to stay, the rumblings of the past couple of weeks will be only the beginning.

Key Point: BUT THAT AIN'T TODAY.  You could have made the same argument (albeit with less damning data) for the last few years. The ONE THING we have to depend on to keep this bull market show going? The FED has no backbone. IF we get a hot print on CPI tommorrow let's look to see what they say AND what they do; I'll tell you this for sure--the New Chairman Powell does NOT want to be the Fed Chair known a "Bear Market Powell"...which IF they become hawking on inflation and tap the economic brakes too hard...he will be. 

ALSO ...lets not forget that there are elections coming in November. I am NOT confident the American electorate has a clue to the fiscal armageddon our Dear Father and our Dear Congress are cooking up for America with complete HORSESHT economic assumptions and $2 trillion in money on the Treasury credit card (or is it a variable rate HELOC?) in 2019. 

Here is my rant on the issue from yesterday (publishing today on

#EconomicsMatters #MathMatters #GOPTAXPLANSCAM
When we published our analysis of the promised "Tax Cuts Will Pay For Themselves" promised from GOP leadership and the WH as complete and utter horseshit, my friends who trust Our Dear Father and the holy spirits McConnell/Ryan all yelled and screamed "It's just like the 86 tax cuts...just you wait...we will have a budget SURPLUS from all the new marginal economic growth in less than 10 years!"

This morning the White House called bullshit on their bullshit as expected. Their fantasy budget of course is DOA..Congress just passed the 2 year budget so all of this document in aspirational economic and legislative masturbation.

But in a RARE moment of economic truth telling, when you read the fine print of the White House budget, low and behold you see when compared to what the Treasury Department and the White House had PROJECTED it now forecasts that tax revenue will PLUMMET in the next few years and never recover to the levels forecast before the tax plan was enacted in December.

And those plummeting tax revenues are even MORE HORSESHIT as well because forecasts are only as good as your baseline economic ASSUMPTIONS. Trump’s budget relies on growth hitting 3.1 percent this fiscal year and staying above 3 percent through 2024, a sustained stretch that hasn’t occurred since the 1980s.

EVEN in red hot late 90's we only exceed 3% GDP growth till 1997-2000 but STILL were below 3% for the entire 90's. Unless the GOP has invented Internet 4 and 5.0 and is not telling us, the ACTUAL budget deficits will be at least $2 TRILLION in 2019 and $2020 alone!

The Congressional Budget Office has been assuming a much more modest 1.9 percent growth figure for the next decade, since most experts anticipate there will be a recession at some point...and of course there will be. And in the next recession there won't be the Fed able to ride into action and drop short term interest rates from 5% to 0% because if the DO have 5% interest rates we will have Dow 20,000 and a horrendous Bear Market for stocks AND bonds.

But I think even worse is the political naivete from this White's as if the people in charge think they are running a private company with no board of directors aka Congress or elections in 2018 and 2020.

One program that would face the biggest reduction is the Supplemental Nutrition Assistance Program, which is a version of food stamps run by the Agriculture Department. The White House proposes cutting $214 billion from the program over 10 years, although Congress often fights about changing SNAP and rarely has enacted changes.

The White House plan would cut an additional $1.5 trillion over 10 years by reorganizing the government and instituting a plan that would cut a number of programs by 2 percent each year, something that CAN'T pass Congress because lawmakers agreed to increase spending across the board last week.

Other parts of the White House’s budget are less defined. For example, it proposes to save $139 billion over 10 years by reducing “improper payments government wide.”

I assume part of that fantasy is reducing the cost of flying or driving the POTUS to play golf 110 days out of our 365 day year?
Seriously...we COULD easily save $200 billion a YEAR if we plugged Medicare payment system into a 21st century prospective payment fraud system like the private sector does BUT the Trump budget CUTS the budget for Medicare fraud detection ( can't make this shit up.)

Last year, Trump and his budget director, Mick Mulvaney, sought to use the budget as a way to promise that the deficit would be eliminated over 10 years, even though many of its proposals were not enacted.

But this year’s proposal comes just days after Congress agreed to increase spending by $500 billion over 10 years, boosting a combination of military and domestic programs to secure votes from both parties. So like I said this budget and its assumptions are a pipe dream.


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