Derivatives Trading Legend: "This Is The Signal That An Iceberg Is Dead Ahead"

After building out Merrill's mortgage trading floor basically from scratch, then moving to the buyside at Pimco, one year ago Harley Bassman, more familiar to Wall Street traders as the "Convexity Maven" - a legend in the realm of derivatives (he helped design the MOVE Index, better known as the VIX for government bonds) - decided to retire (roughly one year after his shocking suggestion that the Fed should devalue the dollar by buying gold).

But that did not mean he would stop writing, and just a few days after exiting the front door at 650 Newport Center Drive in Newport Beach for the last time, Bassman started writing analyst reports as a "free man", in which the topics were, not surprisingly, rates, derivatives, cross asset interplay and, of course, convexity.

And, in his latest note, Bassman takes on a topic that has become especially dear to the Fed and most market observers: the continued flattening of the yield curve, the timing of the next recession, and what everyone is looking but fails to see, or - as he puts it - what is truly different this time.

Bassman's full thoughts below:

The Path Forward

Let me offer a follow-up comment related to "Catch A Wave" from June 29, 2018. The Yield Curve, as described as the difference between the T2yr vs T10yr rates, will not invert until near the December FOMC meeting.  This is when to start the clock for the typical 18-month lead-time to a recession (sometime in mid-2020).

As such, I am not bearish on SPX; the front-loaded corporate tax cuts will provide near-term support for earnings while the debt balloon is deferred to the Millennials (who to their chagrin, forgot vote).

The most common push-back questions why not just execute the steepener (long 2s vs short 10s) in spot (or forward) space:  Positive carry and no option cost. The other frequent comment asks:  Why now?  If the curve will not invert until December, one should just wait until then for a better entry level.

My answer is "yes" on both counts, those are much better executions if you have certainty; but I am not so confident. 

While we are now quite familiar with Trump's negotiating style of 'bluster and retreat', it is quite possible that foreign leaders may actually take him seriously.  Thus, similar to how WW1 was the unintended conflict, a global trade war could be the unfortunate result of clashing egos which will accelerate the risk calendar.

As such, I am willing to pay a few pennies to effectively own a three-year option two years forward via the purchase of a full term five-year option. Additionally, using options (instead of futures or swaps) offers a limited-loss risk profile with more leverage and the comfort of not being stopped out.

Others have commented that "it's different this time"; that QE and unique FED policies will negate the inverted Yield Curve signal for a recession.  Indeed it is different this time: Historically the Curve has inverted from the FED jamming their policy rate higher; in contrast, this next inversion seems to be driven by the back-end coming down.

Asset prices are a signal, such a pity that sometimes this information cannot be discerned until after the fact. 

What is truly different this time is that past inversions have rotated around a ~5%-rate while this time we will rotate around a ~3%-rate. 

The signal that an iceberg is ahead is NOT that the FED is jamming the Yield Curve flatter, but rather that long-term interest rates have declined by 30bps through the most recent FED hike; and that this is occurring despite massively expanding supply thanks to Quantitative Tightening (QT) and the Tax Package.

Market pundits like to say: "They don't ring a bell at the top".  My retort is that they do, you are just not listening.

* * *

Recent transactions I have done:

  • Buy five-year expiry Yield Curve options, versus Sell three-year put (payer) option on 20yr rate - K = 4.0%
  • Sell Closed-end Funds invested in High Yield and Loan Buy Closed-end Funds invested in MBS and MLP
  • Buy MXN currency funded by short EUR (MXN/EUR)


dead hobo El Hosel Tue, 07/10/2018 - 14:41 Permalink

Money pros are really dumb.

Rather than assume the yield curve forecasts what it would have forecast in 1970 or 1980 or 1990 or even 2000, why not assume it's useless now due to world wide central bank rate management / manipulation?

Why not assume it's a coiled spring and that rising short term rates are stored energy that will cause long rates to spring and power up to normalization? Perhaps 4% to start on the 10yr? Quickly when it hits?

Calling money pros dumber than a sack of rocks insults rocks.

BTW, quickly rising long rates = capital loss with long bonds = margin issues = liquidity crisis = everything goes down fast.

Money pros, the smartest ones only - whistling past the graveyard.

Also, the story at the top is absolute gibberish. Really goofy and unintelligible. Money pros are really stupid.

Also BTW, Ding.

In reply to by El Hosel

DownWithYogaPants Theosebes Goodfellow Tue, 07/10/2018 - 15:38 Permalink

a recession (sometime in mid-2020)

Did I not say that the Federal Reserve was playing the movie "Get Trumpy"?????


 Thus, similar to how WW1 was the unintended conflict, a global trade war could be the unfortunate result of clashing egos

Uh No.  It was said at the Chosenite Banker congress in the 1890's that there would be 3 world wars when there had never been one before.  How did they know this?  They all just had crystal balls right?  The Private Central Bankers made it happen.  In addition in order to have WW1 the Chosenite Bankers knew they needed to monetize the vast wealth of the USA to have their little shindig.  That's why:

  • Federal Income Tax
  • Federal Reserve Bank - not Federal and has no reserves.  It is a private cartel.

were created.  Rothschild horse traded getting the USA into the war for the creation of Israel.  See the Balfour Declaration.

So do you really really still think that WW1 was just some unhappy Murphy's Law accident?

FYI:  The USA helped develop Japan and Germany between the Civil War and 1900.  Then all of a sudden we ended up in a war with both of them.  Do you think that is an accident too?!   For bankers broken window theory really does work. Not so much for the rest of us.

In reply to by Theosebes Goodfellow

bshirley1968 pods Tue, 07/10/2018 - 17:22 Permalink

Really.  All these trumptards just now coming to the party are like their man-crush......think everything is about them....and him.

This massive debacle was in play long before Trump decided to take the helm.  He just got lucky, I guess.  Kind of like he did 4 times before.

The motivation behind the "opinions" here are telling.  I will gladly tell you that I want this bitch to go down like the Hindenburg.....and I'll gladly tell you why.  Because the only chance we have to get out of the clutches of the banksters is for this pig to get hammered.  The problem is Wall Street will go into overtime blaming EVERYONE but the banksters......and stupid sheeple will go to the polls again thinking they are voting in a savior who will fix all.

That is exactly what pisses me off so much about all this dems vs. repubs, liberals vs. conservatives, welfare, jobs, exports, NK, Iran, Syria, Venezuela, Brexit, Italy, the SCOTUS, etc.....ITS ALL A FREAKING DISTRACTION!  YOU STUPID SCHMUCKS!  Wake the fuck up!  It's the DEBT....DEBT......DEBT.....DEBT.....DEBT and the monsters that control the DEBT.  It is driving EVERYTHING....and it will be the cause of the next recession, depression, crisis, whatever you want to call it.....AND THERE IS NOTHING TRUMP CAN DO TO STOP IT.  If he were smart he get it on ASAP.  This ain't the movies and there will be no hero, happy ending.

You can't beat the MATH.  You bunch of elementary pussies that think "winning" is making liberal scream with fury need to grow the hell up and see what is about to go down and who is at fault.  If not, then after the carnage, the bastards will be even more in control.....because all you Trumptards will have taken your anger out on anyone that made your man-crush look bad.

The idea of freedom and America is way bigger than any one man and beyond the ability of any one man.  Start thinking about your families, you communities, your country.  Drop this "our team" bullshit.  It's the corrupt banking system and their virus called currency that if screwing everything up and NOTHING changes until that is shut down.  The Federal Reserve Act should be abolished and the power to "coin money" put back under the control of congress.  Coin money WITHOUT INTEREST!

For the love of God, please go educate yourselves:


In reply to by pods

el buitre bshirley1968 Tue, 07/10/2018 - 18:52 Permalink

There is no doubt that this sucker is going down.  It's gonna go down harder than anything in financial history because the credit to real wealth is so high with the funny money leveraged with the derivatives.  There are only two real questions - when and what is coming out the other end?  As my former Rasta neighbors would say, "It soon come." Even if the central bankers got cold feet at this point, and there are signs that they have, it is way to late to alter course. 

This thing has been engineered for at least one hundred years, and maybe a lot longer. It appears over that time like a diver bouncing higher and higher on the high board before the plunge for the gold.  This is the last giant pump and dump, the bankers have put all their chips on the table.  They feel that by breaking the leg of the 7 billion serfs on this planet, they will reset it the way they want it, and being the satanista scumbags that they are, it will very much resemble the Hunger Games.  Like Lord Blankfiend, they are doing God's work, but they have neglected to name the God they worship. But the question is as we all approach the cliff's edge, are they going to pull it off?  They are nervous.  The internet was suppose to be an instrument of surveillance and control, and the 5G rollout is a quantum leap in its weaponization, but they definitely underestimated its educational value as we chimps make hand signals and grunt at each other across the globe.  Arrogance is always the downfall of those who would declare themselves as gods, which the Greeks portrayed in their tragedies as hubris.  I don't think they will pull it off, and in the end our Masters of the Universe are going to come to bad endings, but for the rest of us it ain't gonna be an easy ride.

In reply to by bshirley1968

dirty fingernails el buitre Tue, 07/10/2018 - 19:07 Permalink

When the hedge funders asked me the best way to maintain authority over their security forces after “the event,” I suggested that their best bet would be to treat those people really well, right now. They should be engaging with their security staffs as if they were members of their own family. And the more they can expand this ethos of inclusivity to the rest of their business practices, supply chain management, sustainability efforts, and wealth distribution, the less chance there will be of an “event” in the first place. All this technological wizardry could be applied toward less romantic but entirely more collective interests right now.

They were amused by my optimism, but they didn’t really buy it. They were not interested in how to avoid a calamity; they’re convinced we are too far gone. For all their wealth and power, they don’t believe they can affect the future. They are simply accepting the darkest of all scenarios and then bringing whatever money and technology they can employ to insulate themselves — especially if they can’t get a seat on the rocket to Mars.




I wasn't going to comment anymore but this needs to be shared


In reply to by el buitre

Giant Meteor Captain Chlamydia Tue, 07/10/2018 - 22:08 Permalink

"A measure introduced last month in the House would punish anyone wearing a mask who "injures, oppresses, threatens or intimidates" a person "in the free exercise or enjoyment of any right or privilege" with a fine and up to 15 years in prison."

Hunger games perhaps, for awhile anyway.

This is going to put a major damper on Halloween if it makes it ..

In reply to by Captain Chlamydia

Zorba's idea bshirley1968 Tue, 07/10/2018 - 19:24 Permalink

I think you exaggerate the so called Trump phenomena...the 16' results were largely a good number of American's common sense aversion to the Clinton Crime Cartel be perpetuated. As for the OCEANS of doesn't take a Nobel prize in Economics to understand it will never be discharged. Hell if I know whether Donald will look out for the little guy when the SHTF, but like most flyover Americana, I sure as hell knew the Clinton's would screw everyone left with a pulse except their CGI Funders. To say the least, your a bit arrogant assuming flyover America doesn't see the coming Debt tsunami.

In reply to by bshirley1968

bshirley1968 Zorba's idea Tue, 07/10/2018 - 21:12 Permalink

Let me see if I can be clearer.

The problem is people don't see the problem. I live in flyover Trumpville. I talk to them all the time. I voted for him. They talk about liberals, pedos, commies, Assad, evil Iranians, socialist Venezuela, Obama, Hillary, tariffs, Russian probes, Mueller, FBI, mean Ole Chinese, SCOTUS picks, illegals, border walls, blah, blah, blah.....

Start talking interest rates, Federal Reserve, bond market, pension crisis, sound money policy, real wages, real job numbers, wealth transfer etc. and they start dozing off or get this far away glassy look in their eyes.

Now I axe you! Which of those list do you think represents the real danger to this country? See, without the second list, the first list would not be the issues they are. The "money" i.e. debt is what feeds the corruption and communistic ideology. The debt funds the matrix. The debt is the drug marching us all to the slaughter. But all Trumptards care about are liberal crying in a protest because their birth control might get taken away.

That misdirection and misplaced blame is a real problem. It's time to stop bitching about the symptoms and get to the root of the problem.

In reply to by Zorba's idea

Zorba's idea bshirley1968 Wed, 07/11/2018 - 01:08 Permalink

B...The underlying force which has destroyed the "smalls" ability to accumulate wealth let alone pay their monthly's is the Federal Reserve. Perhaps there isn't the "Hundredth Monkey" in terms of awareness that this private Banking Cabal is a Private institution without a penny's worth of reserves. All roads to America's decline and likely fall lead to their doorstep. I have voted for nearly 5 decades...not once have I heard a "vetted-selected" candidate campaign for Ending the FED. The few who have have been dismissed as eccentric lunatics and anti-American. The people you refer to have ZERO chance to fix the problem causers you correctly identify by using the very system and institutions that are in fact corrupted and deepstated. We the people are coming close to the fork in the road where we either tear it all down, i.e., our whorish corporatized Two-Party system of our faux representational form of government. That is in my humble opinion the only honest solution. The scope of the Tyrannical Lawless in our government is as vast as our oceans of debt. Your assertion that all Trump supporter care about is Abortion or other social issues strangely echoes the very same narrative our Presstitutes peddle 24/7. The core reality with these concerned citizens is their pocketbooks and all the countless ways our government makes Tax Donkeys of all of us...and we are fucking tired of it. The restlessness throughout our nation resides along this fault-line. AUDIT THE FED/END THE FED.

In reply to by bshirley1968

wellmaybe bshirley1968 Tue, 07/10/2018 - 21:24 Permalink

right on whoever you are!  they keep doin it   pit us against each other while we (its OUR $) pay for their stupid fuckin sociopathic behavior   watch this political cycle same as last  NOT ONE candidate will mention the debt   ron paul?  yea he bitches a little to fundraise then votes with the idiots   almost everything is a MORAL ISSUE    keep writing frank

In reply to by bshirley1968

Recriminator bshirley1968 Tue, 07/10/2018 - 21:45 Permalink

Talk about a pile of distended BULLSHIT!  There were a dozen conspiracy theories wrapped-up in ONE post ! Some observations were RIGHT ON - like the major component of world financial problems - DEBT, DEBT, DEBT ! ! !  But the Banksters ? ! Bullshit.  Worldwide, it's the Liberal / Socialist politicians who have borrowed and spent "free countries" onto the "BRINK". With no conspiracy needed, just look at what the rad-Left DEMS have done to the U.S. - social programs AND redistribution ARE out of control ! The Left is trying to take us down - and it may be soon.

In reply to by bshirley1968

bshirley1968 Recriminator Tue, 07/10/2018 - 22:09 Permalink

I try to be patient with guys like you, but time is running short.

If it wasn't for the out-of-thin-air money printing used to buy of these politicians who in turn use it to buy off their constituents, then we wouldn't have all this run away corrupt socialistic bullshit.

Easy, debt money printed out of thin air has created a society that has no idea of value. They have no clue of the value of money. When you have to grow it, raise it, dig it, build it, make create value....then you learn the meaning of value and what it is to EARN something.

This isn't a conspiracy, and the fact that you think it is tells everyone here that you are still in elementary school on this topic. I suggest you go watch the videos I them at least twice, and then come back.

The debt based, easy money IS THE PROBLEM. Without it, there is no socialism....dipshit. Couldn't resist.

Edit: And let me add that the socialist programs of the conservative right are just bad....the MIC, corporate welfare, etc. The MIC alone accounts for over 700 billion dollars of yearly government waste....not to mention the 21 TRILLIONS that the Pentagon lost! I guess that is a conspiracy too. So get off your right wing high horse on this topic. The right is just as big of a government money whore as the left.

In reply to by Recriminator

Archibald Buttle bshirley1968 Wed, 07/11/2018 - 02:07 Permalink

i find myself beating my head against this same wall. as trite as this sounds, "the little people" really need to put aside their various grievances long enough to take care of the debt as money problem. but nobody wants to hear it. it's like people are conditioned to be unable to recognize the fact of their own enslavement by this insidious system. no problems will be fixed without taking care of the elephant in the room first. and once the owners have been dealt with, i would be content if, in a worst case scenario, the aftermath resulted in "the little people" going back at each other's throats. i still retain a shred of hope that once the boot of debt is off our collective throat, people might just calm down a bit and learn to get along. they are going to need to, at some point.

In reply to by bshirley1968

Econogeek bshirley1968 Wed, 07/11/2018 - 10:49 Permalink

I think you're arguing the-chicken-or-the-egg.   Are bankers the chicken and politicians the egg, or vice versa?

Each is a host and a parasite.  It's a symbiosis, an unholy alliance.  Each would die without the other -- the socialist politicians couldn't buy votes with giveaways unless the money-creator types (Fed, banks, shadow system, some hedgies, certain corps) supplied unrestrained 'money'.

It's Gresham's Law - vs - Marx's theory that labor is the source of all wealth.  The little guys cling to the idea that labor, and labor only, is what creates wealth (the definition of integrity), while the Big Money Big Power guys know that by financializing labor and debasing its value (CtrlP) they can get rich (the definition of theft) themselves.

The money-creators and the politicians need each other.  Each is helpless without the other.  Where governments exist, there will always be unrestrained money creation, from coin-shaving to shadow dealmaking in derivatives.

Thus the efforts of Bitcoin et al. to create a semi-financial version of gold.  I think politicians and the Big Money people will figure out how to shave cryptocoins too.  It's what they do.  They're good at it, have had a couple thousand years of practice.  It's not different this time.  But I'm glad to see some of the bitcoin buyers get rich in the interim.

In reply to by bshirley1968

lonesome foghorn bshirley1968 Wed, 07/11/2018 - 00:36 Permalink

That Mike Maloney vid is excellent. Thanks.

No matter how many times I hear the whole Fed/IRS/1913 story, I just can't believe it.

And yet the rotten putrid MSM still has the gall to try and smother any little flame of truth that appears anywhere by calling it a conspiracy theory.

Brother, The Fed is nothing but a conspiracy. 

American income taxes pay vast amounts of interest to an entity that loans money it does not have, and said entity's owners are ... Unidentifiable.

And 99.8% of the people have no idea this is happening.

We live in darkness.

Satan loves the dark.

In reply to by bshirley1968

Ima anal sphincter ThinkerNotEmoter Tue, 07/10/2018 - 16:12 Permalink

My dehydrated food is still good. My guns are still good. My ammo is still good. My water purification systems are still good. My generators and propane are still good. My gold and silver are still good.

My eyesight is taking a shit, but my dick still works. It's all good.

In ten years???? Most everything except the dick.....will still be good.

In reply to by ThinkerNotEmoter