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These Are Deutsche Bank's Two Top Trades After A Fed Rate Hike
When it comes to Wednesday's rate hike, the opinion of Deutsche Bank, which has openly called such a move a "policy error" in the past, is quite clear: "the Fed’s objective is to slow credit. With deficient market liquidity that is easier done and said. In doing so it appears they also may help tidy up outstanding FX issues around RMB. Neither are good for risk on now and both favor curve flattening."
To be sure, DB does not want to come out sounding like a tinfoil hat blog by telling the whole truth without spinning it at least a little bit, which is why it adds that "Doom and gloom is not the official call on either the US economy, the Fed nor China. But it is our rates view that doom and gloom should be hedged. Do not underestimate how far rates can fall or the curve can flatten depending on the extent to which the Fed insists on tightening and the sensitivity of credit creation and EM/China fall out."
That is about as close as DB's Dominic Konstam will come to saying "doom and gloom" is now the base case.
But that's in the medium-term. How to trade the short-term which even a resigned DB believes means a Fed rate hike (even if it is promptly undone with a rate cut or worse as Hilsenrath hinted yesterday)? Here are Konstam's two core trade recos for the next few days... which some may say is really one trade.
It’ll take some deep dives in SPX to stop the Fed from tightening. Possible but even we cannot be that pessimistic. So they hike. Then what? How many can they really manage. Less rather than more. And it all depends on how quickly they achieve their real goal. The real goal is not managing inflation higher, otherwise they wouldn’t hike at all. Nor is it managing unemployment higher. That’s not the mandate. The real goal is to cut credit – the evil eye of leverage that threatens longer term sustainable growth. Partly thanks to an already over extended credit cycle and super deficient liquidity, they probably don’t need to hike very much at all. For safety we’ll assume they might try to get to 1 percent. That’s still plenty good enough to expect the curve to flatten and bullishly from the long end. Don’t under estimate how far rates can fall in this scenario. 5y5y easily can trade to old lows and 2s-bonds can flatten to 150 bps. China, like credit should also “get resolved” in Fed tightening. A golden opportunity to have more extensive depreciation.
Here DB makes an amusing detour between what it "really" thinks, and its "official" bullish, optimistic position which is spun by the cheerleaders such as LaVorgna and Bianco, whose only job is to placate bullish clients who hear what they want to hear, and spend some "soft dollars" with the German bank:
Of course to be clear our official view on China is not that. Officially, we have been optimistic on Chinese growth and limited scope for depreciation. Officially we also think the Fed has plenty of ability to raise rates without flaying the economy and credit markets.
But... "Officially though also, we think investors should use the rates market to hedge those official views."
We get it: ixnay on the Koolaid-ay.
What is more surprising is that rarely if ever have we seen a more acute example of just how profoundly one group within a bank disagrees with the bank's "official" cheerleading narrative: things must be really bad internally for the discord to be so public.
So putting all this together, what is DB's recommendation, assuming the market does not crash by over 100 points overnight and trigger a rate hike pause?
It's two fold: either buy bonds, or buy even more bonds.
Even without the profit constrained world for the dim labor market view, the Fed wants credit to slowdown. When credit slows down, buybacks slow. A roll over in the credit cycle is always associated with significant slowing in the labor market. It is true there are some metrics that suggests the corporate sector still has some juice in it, in terms of net worth, outlays to profits. It is not nearly as stretched overall as it has been on these other metrics this time around. But at this rate, it pretty much will become mid 2016. If it wasn’t the Fed wouldn’t be raising rates after all. So maybe there is an immaculate tightening but the choice seems to be either the Fed achieves its goals quickly to a very low terminal Funds rate. Buy bonds. Or they need to be even more aggressive. Buy even longer duration bonds. The choice is more about where to put the long leg of the curve flattener not about whether to steepen or flatten the curve.
And just to confirm that it is all about return of capital, not on DB also points out what has been the topic of the past week, namely the spectacular implosions in various junk bond funds, something which should not be happening if the economy and financial conditions were strong enough to handle a tiny 25 bps rate increase:
Credit stresses in the market place appear to be fast emerging. As our HY strategists have argued it is not good enough to “ignore” credit woes simply because they are concentrated in one sector. Crises are always concentrated in one sector but that then leads to contagion. Contagion occurs because of leveraged and forced selling and forced refinancing that then cannot take place.
Taking all this together, what DB's "unofficial" message is, since there is no "immaculate tightening", one which soaks up $600-800 billion in liquidity to start and goes up as much as $3 trillion at 1%, is to start frontrunning QE4 and/or NIRP by the Fed, something which the market will "force" on Yellen in two distinct ways - by causing a sell of in stocks, and by inverting the yield curve hinting a recession is imminent unless the Fed eases immediately once it begins tightening.
Just as Hilsenrath warned yesterday would happen.
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"....is to start frontrunning QE4 and/or NIRP by the Fed, something which the market will "force" on Yellen in two distinct ways - by causing a sell of in stocks, and by inverting the yield curve hinting a recession is imminent unless the Fed eases immediately once it begins tightening."
So....buy buy buy?
<Is that you Cramer?>
Short DB?
http://www.goldsqueeze.com/home/deutsche-bank-something-is-seriously-wrong
Si!
The world is turning collectively rather soft, mushy and smelly. Janet tightens and it will very negatively impact psychology.
Just what the doctor ordered
Just the crisis the new world order doctors ordered.
Never let a crisis go to waste. And if there's none, make one.
Troof
All the realtors in USA will scream bloody murder if Yeller raises the rates. the petite mini skirter chick realtor down the block says house prices will drop 10-20% of rates are raised no matter what. She said normailly a house price will drop 10% for each 1% rate raise but she said people are so tense right now they'll all run for the exit at once and prices may drop much more much faster.
Gonna be interesting.
Short them all XLF. *not investment advice; only gambling advice - your money your chance...however if you are among the inner circle, then the money is free and the gamble is always a win...have fun!
Those negative yield bonds will be positive in ten years
Where's the screenshot of Kevin's monitor at 33 Liberty, which had buttons for "buy" and "buy"?
Deutsche Bank is very successful so we should listen to them.
Fine. Your likely sarcasm aside (the default tone of being a ZHer), the bitter and sad irony is, had we listened to the Bulls for the last 5 years, rather than the Doom-porn Bears, we'd all be richer, not poorer. Because we would have put our $$$$$ in stocks, not PM.
Ironically enough, now that the stock markets are in the Ionosphere, and Commodities are down deep in the salt mines, is the time to get out of stocks and into PM.
But, in spite of all the proselytizing about Wall St BS and Universal Deceit, good luck in finding 10-20 people here, who will have the honesty and humility to admit that "We (Austrians) were wrong the last 5 years". All they know is that they "will be right in the long run". And we all know about "the long run"...
TIMING & ALLOCATION IS EVERYTHING. Unfortunately for most (99%), you will almost never get the right advice on when to get into what and when to get out of what.
Was that too Truthy for ya? Fine. Junk away then.
Correct answer. No junk, but I assume you are aware that the S & P and Dow are negative for the year. At least until tomorrow.
so sell house,
buy s&p,
buy moar nonds...
got it. Hohum.
"I know it wasn't a requirement to bend over when you bought the bonds, it's just that a lot has changed and since you want to sell now you do..........yeah I'll be gentle...."
Anyone else having trouble viewing the article about "Chinese Official Confesses to Making up Statistics" below? I'm getting an "access denied" screen.
I had opened it, then closed the tab after reading. Tis gone for the moment
This shit would be hilarious if it wasn't sooooo fucking depressing.
I think the gist of it goes basically like this: "For the love of God, buy bonds!"
We've got to sell them to somebody, might as well be you.
Watch how fast these guys shift to "fed save us" mode.
trav7777
'All debt needs to be converted to equity, and the notion of lending to a government to be backstopped by inevitable GDP and tax receipts growth brought to a final conclusion. This means we have to destroy central banks and revert to Colonial Scrip which was a Real Bills Doctrine currency regime.
Banking is a racket...money should not be permitted to "make money" without risk or based upon a presumption of perpetual growth. Every experiment with Central Banking or lending to sovereigns has ended with a gigantically indebted sovereign and a need therefore for growth and strangulatory taxation.'
http://www.zerohedge.com/article/consumer-credit-plunges-175-billion-con...
What you describe used to be called USURY. The Muslims are against it ('Riba'). Christians used to be against it, as were many Jews.
We are all financial Talmudists now. Reaping what we sowed, and allowed to be sown. Bon apetit.
Another sixteenth-century dipshit that doesn't understand simple economics.
Interest rates arise from time preference. People prefer things NOW to things in the FUTURE. The percent a given thing (money, capital, etc) is valued for its current productivity as compared to the future is ITSELF the interest rate.
No Shakespearean gymnastics needed to understand that anyone that lends money NOW wants more back IN THE FUTURE. I am not a supporter of central banks in any way, shape, or form (i am an ancap) but you really need to pick up a book. Hell, just learn the loanable-funds theory of interest. Simple.
my guesses were unicorns and skittles
Front run QE4.
No, seriously.
-DoucheBank™
We here on ZH have Austrian Economics on our side. So we front-ran QE1 and QE2 by buying PM.
Better front-run QE4, before PM goes even higher and becomes totally unaffordable.
Point is, the Casino can stay liquid longer than you can. Bet accordingly.
"-DoucheBank™"
Not yours to TM.
Fri, 12/11/2015 - 09:46 | 6909961
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Frontrunning QE4 means to short the shit out of stocks until the fed intervenes. Then go long. Why go long before a big hard fall?
Because with hft I think they can keep it above 1900 easy. Remember we don't want to create an immediate Calpers crisis. If they raise its because they are confident they can keep stawks inflated.... see today as an example.