Where my substack got it right or wrong, 2024 edition.

Hopefully you can find something in here to read over the holidays.

First up...why bonds suck.

1/ 2/ Running a macro newsletter suggesting individual trades is a full-time job. Execution is as important as ideas which means running a "trades on a platter" newsletter is just the same as running an actual portfolio, and I'd rather do that.

A low EU unemployment rate is hiding horror show productivity growth which is pinning growth at zero.

Any more retrenchment from the private sector (which is getting ravaged in manufacturing) and growth will be negative before you know it...

1/

https://twitter.com/BobEUnlimited/status/1867050055301050502

2/ This is replicated everywhere in the western world apart from the US as government has led hitting and kept unemployment rates where they are

You can't look at euro data through a US lens, the drivers are just so different

Chinese statements yesterday were more direct (and from Xi's mouth, meaningful) than anything that happened during the "Tepper storm"

Watch the behaviour of steel products (rebar here) this time around on a relative basis to equities to gauge probability of true household stimmy

1/ 2/ Last time CSI300/HSI rallied just over 30% from after the first comments (not after rumours started), while rebar was up ~20%

This was your gut reaction jump using 2015 as your mega sized stimulus template

Dec '24/'25 Fed Funds is back to where it was before ZIRP redux madness started in the 1H!

Reaching 170bp of cuts in 2025, we now sit at only 70bp, not even 3 cuts in 8 meetings.

Short-end is as cheap as it ever has been in the post 2022 "new world"...

1/ 2/ ... as long as you think the Fed stays in a cutting cycle.

That end 2025 point is just under 4% now, compared to 3.5% well before the Fed started with that 50bp cut

Buy the rumour, sell the fact is still king

LOW UNEMPLOYMENT IS A MIRAGE

When low unemployment is enabled by low productivity government jobs, GDP growth is sacrificed to an extent that recession is a small step away even at full employment.

Labor force growth becomes the only GDP driver. A bad mix.

1/ 2/ The gap in performance of GDP per capita across developed nations has been stark. Most are in per capita recessions.

I've written a lot about the power of US fiscal policy as a driver for growth, but this isn't even the main reason for per capita outperformance.

US 3Q GDP - banger headline with weakening composition

Nom: +4.6% 🔽
Real: +2.83% 🔽
Real ex Exp/Inv: +3.56% 🔼
_______
PCE: +2.46% 🔼
Govt: +0.85% 🔼
Res I: -0.21% 🔽
Biz I: 0.46%

Absolutely no recession signal, but detracting resi investment being offset by govt a concern

1/ 2/ The US is still a 3% real, 5% nominal economy.

Consumption, the largest component, has continued to trend up from the fiscal hole of 2022.

The current economy will perform in-line with the 10y average (dotted line). This is your base for real GDP growth.

TRUMP and the narrative for the 10y bond

In eco terms MAGA summarized:
- Trade deficit is too big, make it smaller
- Govt spending is too big, make it smaller
- US should lead in eco growth, so cut taxes to keep budget deficit and hope lighter regs help

Yields up or down?

1/ 2/ Taking the total of all the election promises I think these 3 points summarize the bulk of the rhetoric from Trump and the crew around him.

Base case unchanged policy was that long rates are too low & the curve is too flat. This is explained below.

macroisdead.com/p/as-a-portfol…

Despite the presence of skyrocketing govt debt charts, average "new money" growth continues to moderate from the heady days of 2022/23.

Oct actually shows a contraction in new debt.

Model still pointing to more downside vol in the S&P.

1/ 2/ Moving average should balance out to about $150bn/month eventually, but the latest print has caused a downturn in the indicator.

I've been vocal about staying away from US 10y longs.

2s10s is too flat, if you want to be long just buy short-end.

BUT how much do curves need to steepen for it to be attractive as a long (for lower rates or portfolio protection)?

1/ 2/ The chart above isn't my prediction, but is priced into the forward curves.

I.e. if the Fed were to cut as the SOFR curve to the end of the cutting cycle (roughly Dec-2025), and the 10y remains where it is, the curve will steepen to +0.74% mechanically.

This is priced in.

The last payrolls print highlighted that we are still in the 3rd act of US rates underperformance v EU:

1st act: US hikes faster post pandemic
2nd act: EU catch up with rate hikes/US tech turbulence
3rd act: Sustained superior eco perf makes it harder for Fed to cut ->

1/ 2/ The chart above is a comparison between the Dec-2025 SOFR and EURIBOR contracts. A falling level means US rates are underperforming (i.e. rising faster than EU).

X-market rates tend to range trade in regular waves.

Why do vol markets blow up?

The 5th Aug carnage was attributed to the "yen carry trade", but I think this is just macro trying to be smart.

While we can trace it back to the Nikkei, the conclusion is that the event itself is random, necessary and impossible to avoid.

1/ 2/ Some background.

The NKY was off by over 11% in the weeks preceding the 5th, with USDJPY off about 5% over the same period.

This was after a considerable period of quiet, with both the SPX and NKY grinding up with no vol over Jun & Jul.

BoJ & Fed and USD and then worry.

Today's PBOC actions give more panic feeling than a Fed 50bp.

Slow motion slowdown, deflation & de-leveraging becomes more worrisome when you introduce shock & awe...how bad is it?

View in charts (long one sorry)

1/ 2/ In a nutshell:

1. Post-pandemic slow in consumption & property partially offset with aggressive exporting of excess manufacturing capacity

2. Property related shortfalls in LGFV revenue is being managed, partially with a large fiscal deficit which hasn't helped the consumer

Tools being used to extend the business cycle now were once implemented only in economic crisis.

By breaking the limits, it seems like the goals of these institutions is to keep the US in constant expansion.

Equity markets love it too, as economic volatility has plummeted.

1/ 2/ Changes in underlying volatility of the economy (as measured by hard data), push up asset prices and encourage more leverage (which pushes up asset prices).

Measuring eco vol can be done as simply as measuring the range of nominal GDP.

The "25 or 50" discussion is painful.

Why?

1. There is logic for a direction to rates, but hardly ever one for individual moves.

2. Market pricing has a feedback loop with the Fed.

3. Hindsight doesn't make the move obvious.

1/ 2/ Every cycle this century has started with a 50bp (ex 2019).

Proof the Fed is always behind the 8-ball? Maybe.

Enough to start this one with a 50? Depends on how they view the current employment trend.

If you think they are worried, 50 is a great bet based on the past.

Keep an eye on this trouble maker - Nikkei futures traded weak in the overnight session despite stability elsewhere in equities

USDJPY looking just as precarious...

1/ 2/ It's managed to avoid the headlines so far without a sure break lower but expect it to make some news this session I'd say

Z4 SOFR has reversed the "game changing" NFP. I think pre-NFP levels act as support here, but the markets schizo approach to perceived recession risks are making both long & short vol strategies underperform.

Short-end sell off => curve flattens => equities rip higher

1/ 2/ 2 yr future back to pre-NFP levels...

The Japanese horror show today (down 12.6%), shows that it isn't about the direction of rates, but the vol a turning point produces.

All started with US CPI which shifted the market on rate cuts. Rates bid, USD off hard, shoulders tapped, risk unwind.

1/ 2/ Short vol/gamma positioning must be way bigger than everyone thought.

Right now we are tracking about the same as 2018 volmaggedon, with gamma trading measurably worse (esp. NKY)

As a buy & hold portfolio allocation, bonds really suck right now.

If the economics deteriorates quickly, bonds:

* Won't protect your portfolio;
* Won't profit more than leveraged short-end

All of this relates to how & why the curve is inverted.

1/ 2/ The 2/10y curve was inverted because the market always expected short rates to come down due to inflation subsiding + being long for portfolio protection.

In reality, the market could never price a normal yield curve because it was never going to believe inflation would stay.

US real GDP prints another solid qtr at +2.74% ex-inv/exports.

3 q's of near identical growth that have different composition - this month residential investment slowed and was made up for by accelerating non-res fixed inv and government...of course.

Don't bet on recession.

1/ 2/ After a slump in govt contribution last month, it's picked right back up to its +0.5% previous level.

Huge deficits will do this.

IT'S OVER.

That print likely ends the monster 3 year bear/flattener trade. I've been wrong the last 2 mths, but its been great before that.

Remained bearish through SVB, Q4'24 pivot.

We've rallied without crisis, and the easy roll up the curve is dead.

What's next?

1/ 2/ Moving back to flat rates in the US and Europe we have to consider our next move.

Being long here isn't clear, there's a lot priced for a Fed that has time to take it easy.

10s are rubbish and you have little reason to own them long-term (next newsletter on this topic)

Bonds have backed up around 20bp to LEVELS NOT SEEN since 2 weeks ago.

This is primarily a Euro story, as Bunds broke upward trend on French politics and have reversed the move just as violently.

Fed path unch, leading to steepening.

I remain very short.

1/ 2/ Year-end Fed funds have done nothing, pricing a cut in the 4th quarter.

Prime reason for continuing to stay short is that I don't think they cut, and even if they do its overpriced and they are likely to be very cautious about further messaging.