This Is The Note That Has Led To A Modest, If Transitory Bounce, In The Market

Tyler Durden's picture

The reason for the ramp in risk as attributed by various buyside desks as to what recently has become the trademark of more hope, prayer and magic from Jefferies' (yes, Jefferies is driving the market for once, who wouldathunk it) David "SPOOS" Zervos, whose latest note that the Fed will follow the ECB and cut its overnight excess reserves rate to -0.25% has picked up some traction, and is causing a modest rise in risk markets. Here is the problem: the Fed will NOT do this, and certainly will not do this for months and months as not only would it destroy the US money market, general colalteral, unsecured and virtually every other overnight market instantaneously (and not even Ben is that dumb to trade a few trillion in private sector overnight funding for 10% in the S&P), but even as Zervos says this is nothing short of a thought experiment in what may happen: "Whether it happens or not is not the point. The issue is that we are not priced for it AT ALL." Correct David: they are unprepared because it will not happen. The Fed will do much more LSAP, and even that other flow-based lunacy, NGDP targeting, before it decides to blow up overnight markets (not to mention destroy the entire Primary Dealer risk analytics system all of which is based on positive flow from Reserves). Because if the Fed telegraphs it is ending the inflows from reserves experiment started 3 years ago, we better be having 4% GDP growth. Reality check: we have 1.1% Q2 annualized GDP. Finally, that whole ECB experiment with negative Deposit Rates led to... absolutely nothing... correction: it led to yet another plunge in Spanish and Italian yields: something the Fed is quite aware of.

Extract from Zervos, whose clutching at straws has become quite legendary in the sell-side community

Besides all the travel last week, I was also quite busy talking to folks about the front end of the US Treasury curve. The commentary I put out on 12-July entitled "The ECB makes the Fed looks foolish" got a lot of folks interested in the idea of a lower IOER in the US. Whether it happens or not is not the point. The issue is that we are not priced for it AT ALL. And with the Swiss 2yr at -43bps, the German 2yr at - 5bps and the French 2yr at +14bps; the US 2yr looks as cheap as Prague! If Ben decides that a 0 deposit rate in Europe gives him a green light to whack the IOER, 2s will rip!! Owning 2s outright and levered has a ton of optionality. There is a few ticks of downside for a point or more of upside. Going into a dovish August 1 FOMC, this feels like a great risk reward trade.


From my perspective, the ECB has done a fantastic job in promoting the idea that 0, or possibly negative, deposit rates can be an effective force in monetary policy. Last week I attached a piece by Greg Mankiw on negative nominal rates. Here is another good one from Willem Buiter - These guys are not quacks! Its a VERY interesting policy exercise.


The quote from the last FOMC minutes suggested the Fed wanted a "new tool". Well here ya go Ben, take the IOER to -25bps, take 2s to -50bps and watch banks start setting LIBOR negative!! If you really want to push the portfolio balance channel this will wake up all the sleeply reserve managers with liquidity needs in USD. Of course as short rates plunge into negative territory, inflation expectations will rise sharply. It will be important to not expect too much love for the long end if this happens. And like I said above, even if this is a low probability event, the mere possibility of it happening makes levered longs in the front end a fantastic trade! No one is prepared for it. Just ask yourself how many risk management departments have shocked 2yr notes to -50bps and 3ml to -30bps in their VAR analytics. Not many!!


Of course that 0 yield on cash might propel some entrepreneural vault salespersons to start a cash USD ETF. Just like the Gold ETF or the potential copper ETF, we could put dollars in a vault and sell shares. The storage and security costs would easily be 50bps or more, so Ben has a little room to experiment before that option creates a genuine move to mattresses and vaults. In the mean time I'm off the spoos + blues idea and back onto the original spoos + 2s trade - the same old weightings, 100m Spoo + 100k/01 in 2s. With negative 2s in play, spoos should rocket!!!


That's it for today! This coming week I will spend some time with clients in Italy before heading down to Corfu for the annual Zervos family pilgrimage. My writings will slow after the Bernanke testimony this week. Ill pick everything back up when I return for the August 1st FOMC meeting. Buy some 2s!! Good luck trading.

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txsilverbug's picture

Of course that 0 yield on cash might propel some entrepreneural vault salespersons to start a cash USD ETF.

Slap a triple A on it and start selling!!  /sarcasm

TruthInSunshine's picture


"Whether it happens or not is not the point. The issue is that we are not priced for it AT ALL."


Yes, David Zervos, so let's "price in" Rainbow Shitting Unicorns, while we're at it.


Oh wait. We have.



FL_Conservative's picture

You're right, Truth.  The logic of a mental midget.  Must be part of Obama's council of economic advisors.

old naughty's picture

...they are now quite aware of something on the other side of the ocean, but not certain things this side of the ocean (or turn a blind eye to them).

Council of Advisers on some-ding.

spekulatn's picture

"On a long enough timeline the survival rate for everyone drops to zero"


Mr. Barton Biggs has died, age 79.



Zola's picture

That guy sounds like a total moron and  banking stooge. He reminds me of Simon Black with his insistence of letting everyone know how much he travels ...

Boilermaker's picture

Yea, but it's working right now!!! YEEEEEHAAAAAWWWW

slaughterer's picture

Let's all buy the 2-year all at once on this NIOER rumor--it's the hottest trade set-up of the week.   Leverage it full tilt balls to the walls.  Ben will NOT be undone by Mario.  LOL!!

El's picture

After watching the market closely for some time, it occurs to me that whatever we are isn't the market. I don't know what it is, but it isn't real.

Boilermaker's picture

Thanks. I never made the connection.

El's picture

LAUGHS! Well, it takes me a while to eliminate all other possibilities sometimes. I can be a little slow to reach a final conclusion.

Debtonation's picture

Couldn't the banks just hold their excess reserves in their own vaults and earn 0% instead of leaving it at the Fed and earning negative .25% anyway?

Offthebeach's picture

They are required to deposit some %.

Beam Me Up Scotty's picture

I'll hold my own money in one way shape or form, before I will pay the bankers and/or government to hold it for me.

radicall's picture

I thought this was the Barton Biggs Tribute rally

slaughterer's picture

The goal: ALL of the MM money in the world to go into AAPL!  AAPL ==> infinity baby.

Boilermaker's picture

LMFAO.. SPX green.

REITs now way up even with the huge retail miss.  Busting 52 week highs.  I had no clue that was bullish for CRE.

At least there is some humor in the pathetic show now. 

doc_in_the_house's picture

i hate to say this...but i told ya!

spx back to 1357....after dropping to 1350


i said:

"spx @ 1350 = down -7 points

covered my spx shorts of 1365 last week @ 1326-1328....will WAIT for 1370+ later this week to the meantime = yawn!! and relax."

this is tooooo funny (manipulation)  !!!!! LOL !!!

TooBearish's picture

ECB cutiing deposit rate to zero has unintended consequences - short money going in to USD short end, compounding Ben's desire to trash the USD...causing GS, JPM, BLK to shutter Euro mmkt funds....

radicall's picture

Treasury yields are lower than they were on May 2nd/3rd when $ES_F was at 1262. Commodities have been pummeled.. but the disconnect really confuses me. 

I love some commodity stocks at the current price, but if S&P goes to 1100 - I wonder where they would end up

Meesohaawnee's picture

manipulation thats so obvious, well unless your one of those asshats on yhoo finance, isnt funny. its downright  depressing. Wall street always bitchin retail is gone. Well what idiot would go anywhere near this joke. Its just a game of donkey kong. Ben gets the finish he wants. If he wants 1370 or even 1400 thats what they get. Its just a propaganda machine now designed to make things look more purdy than what they are. Disgusting.

kahunabear's picture

So you don't think having taxpayers pay banks to borrow money so they can charge taxpayers to borrow that money levered up is a good idea?

Stoploss's picture

Jefferies account holders should be bailing if they haven't already.

TrustWho's picture

Some economic rationale for stock prices moving higher, hell, I thought just the algos using technical analysis metrics with upward bias was the sole driver of this market.

I guess algos require financial journalist/analyst to feed them the right words to support their upward bias. David Zervos ist the idiot...

To-morrow, and to-morrow, and to-morrow,
Creeps in this petty pace from day to day,
To the last syllable of recorded time;
And all our yesterdays have lighted fools
The way to dusty death. Out, out, brief candle!
Life's but a walking shadow, a poor player,
That struts and frets his hour upon the stage,
And then is heard no more. It is a tale
Told by an idiot, full of sound and fury,
Signifying nothing.

Bubbles and Busts's picture
Making IOER Negative Equates to Raising Taxes And Raises Potential Of New Recession (