Two Kinds of Eases

I recently had some discussions with colleagues about the amount of easing priced into the curve. There seems to be a common misunderstanding about what the amount of easing priced into the market represents. Just as you need to understand that Democrats and Republicans are going to react differently in the averaged sentiment and inflation expectations data that are reported, you need to understand that there are two main categories of eases that are combined to form the pricing average that you see in the markets. Knowing the difference will change how you think about probability distributions and may open up some areas of value on the curve.

But first, my thoughts on a busy week in news, heading into an even busier week of news ahead (not in any order):

· The JPM S&P Options Whale. Apparently the JPM S&P put strike is very close (5565), with a Monday expiry. This somewhat explains the constant selloff Friday (other side frantically hedging). So it’s unclear how “clean” the Friday interest rate move was. We could get a wild move Monday!

· I think the auto tariffs were mostly expected, although I suppose there could have been some who thought these may get reduced. Trump mentioned a tax deduction for auto interest, so this is probably his mechanism to offset some of the impact for US consumers. As mentioned in my negotiation primer in early February, having high tariffs gives more negotiating room, and subsidies can be used to offset the domestic impact.

· Trump said the April 2 tariffs were going to be “lenient.” It’s not clear to me if this was (a) some kind of pathetic attempt at holding up equities, (2) “the dog ate my homework again” where there was not enough time to do research on the 15 most offending countries so they decided to take a slow step-like approach to tariffs on all countries at once to see if anything breaks, (3) he actually intends to offer low tariffs longer term. The first two are clearly possible. While Trump went with the Cosmo Kramer deals earlier, I think it is highly unlikely Trump plans on stopping the increase in tariffs after one round of lenient tariffs.

· Trump and Carney seemed to have different tonal versions of how the talks went. Carney said the relationship will not be the same, and Trump seemed to play up the constructive nature of the talks (even though they won’t meet until after the elections). Carney’s version is more accurate. Trump was probably trying to keep the stock market supported.

· The international backlash has started against the US. I heard Canadian travel to the US dropped 70%. And earlier in the month, a Danish pension fund divested from Tesla. I may write more later, but in the meantime, you should listen to the “American Exceptionalism” podcasts I highlighted in the box. Apparently there have been $10-17 trillion in foreign purchases of US assets in recent years. It’s not crazy to think that some noticeable fraction of the accumulation unwinds. ANY UNWIND WILL PROBABLY NOT REVERSE FOR AT LEAST THE NEXT 3 YEARS (most of Trump’s presidency), regardless of whether there are any “deals.”