The Eurodollar’s Nose

What an intriguingly odd month September 2017 turned out to be. To start with, Reflation #3 only seemed to be gaining strength. The full throat behind Inflation Hysteria #1 was still ahead, as was its related personage the BOND ROUT!!!! And yet, early in that late summer month a sudden eruption; actually several.

On September 5, T-bills. A day later a big one, CNY. Gold. Repo fails. And on and on.

While Reflation #3 would continue forward, and after October 2017 it seemed like the situation in these others (all of them, of course, deeply connected to eurodollar “stuff”), was calming down, by the end of that year a return of the more ominous tones and bass notes.

All the while the bond market, from UST’s to JGB’s to Germany’s bunds were signaling the other – the reflation. There had been the Tax Cut and Jobs Act (TCJA) later in December 2017 to refill those expectations along with more forcefully hawkish sounds from the likes of Yellen. And don’t forget the chorus of kings, the Bond Kings like Bill Gross.

While optimism seemed to be gaining at least in rising nominal yields following September 2017, we couldn’t seem to escape the escalating warnings underneath that whole time. I wrote during that particular month:

It started with repo, and that part is confirmed. The real question is what this all means, up to and including whether it marks like fails in June 2014 the start of whatever the next phase of eurodollar decay might be. We obviously won’t know anything like that for some time (and we have to be very careful about bias, meaning that since I suspect it, it’s easy to believe and see what I think is already there), but the biggest clue will be in escalating warnings like this.

Five months is what it would take before those warnings underneath broke out into the open. Early February 2018, the dollar stopped “crashing” and then things really got serious (including in the real economy, as places like Germany and Japan quickly fell apart).

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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