Thursday 25 January 2018

US bear flattening and the Euro

As US curve bear flattens with xccy swap costs it must be low/neg carry for Eurozone banks to hold treasuries and swaps. They bought ~USD600bn of Treasuries after 2012 as part of EU QE leakage and swap spreads also went negative.

Unwind of this is pressuring the USD/ Euro exchange rate, pushing swap spreads to positive and pushing up the overall belly of the US curve?

This is transmission of QE unwind/ Fed rate hikes.

Thought Kevin Muir's comments here were interesting:

EU QE leakage:

Treasury holders:

Just looking through the numbrs above the main EU countries and Cayman have bought about $100bn more in the year to November. Cayman is flattish YoY but should be a source for a fair amount of the EU holding.

Monday 15 January 2018

Google's bait and switch ad model

Google's youtube ad model is funny. On my account on roku/ amazon firestick I watch some finance and current affairs clips like TYT Network.  

Google then uses that 'profile' to sell ads, but most of the ads are shown when my kids are watching clips like Peppa Pig or Alphablocks and not during the grown-up clips.  Also known as a bait and switch. 

The ads are for things like ETP trading accounts, new Apha Romeo cars and recently bloggers promoting their 'crypto expertise'. 

 There is no way the ad buyers at Alpha Romeo are agreeing to spend money advertising luxury cars to pre-schoolers. The money is 100% wasted. They cant plausibly be aware of what is happening.

Google will know they are showing the grown up ads on kids clips. Usually the same clip is shown in succession until the ad budget is used up. 

You have to wonder what the legal status of this business model is and also when the buyers will figure out their money is being wasted.

Given the ad sales are via algorythm, presumably Google has figured out how to game the buyer algos. Im guessing 80% of the ad money is available for middle class grown ups with disposable incomes in middle class areas, where as 80% of the volume of youtube is kids.

Wolfstreet has covered this a few times.

Monday 8 January 2018

Fixed income vol and wages.

Fixed income vol has not been lower since Nixon ended Bretton Woods. But need to see some wage inflation to turn it around and so far companies seem to prefer to not fill vacancies than bid up wages too much. That said with JLTs at 1.1 unemployed for every job ad something has to give at the margin and some wage inflation should rebound this year after six months had stagnation at the 3-3.6% range. 

Just looking at wages peaking and slowing in isolation you could be forgiven thinking its about to see the end of the cycle. However corporate margins are still fairly high desipte having fallen since 2012, and Fed rates are still very loose.

This current credit led cycle is clearly late in the day, but it may be possible to transition to a new cycle led by wages-inflation-capex without a recession in the middle. If the Fed keeps enough behind the curve and if enough companies facing margin pressure decide to invest instead of cut back. 

Bond market yields seem to primarily be handicapping the recession in the transition scenario, but capex seems to be bouncing and Trump is talking about an infrastrcuture deal. 

Hedgeye ran a clip yesterday on the cyclical upturn in a number of sectors including industry: