We’ve said it before and we’ll say it again: one-way bets and crowded trades are inherently susceptible to getting caught horribly offsides when sh*t goes wrong.
And although specs have trimmed 10Y shorts over the last two weeks (they cut around $7.4m/DV01 in the week ended Tuesday, the second straight week of pared bearish bets), eurodollar shorts are still sitting at a record and as a percentage of open interest, the net spec short position in Treasury futs (TY eq.) is still a 3-sigma-ish event.
Similarly, despite the fact that positioning flipped short on small caps earlier this month, everyone was still long the broad market in an apparent effort to fade the Trump trade via the Russell 2000 while simultaneously staying long the very same Trump trade via the S&P.
Oh, and then there’s the spec long in crude which, although it too was trimmed for two weeks straight with the second week capturing position unwinds on the heels of oil’s collapse during CERAweek, is still massive. As for the dollar, here’s a catch-all snapshot up to date through last week’s data:
(Goldman)
All of this is effectively a bet on reflation. (Caveat: the waters are a bit muddy with respect to the dollar, commodities and how the historical relationship between the two can be reconciled with the reflation narrative. Here’s how RBC’s Charlie McElligott put it earlier this year: “when the Dollar strengthens now, [it’s] a representation of ‘reflation’ [but] USD might transition back to a more historical correlation where it is a drag on commodities instead.”)
So caveats and nuance aside, this is all the same goddamn trade. Just ask BofAML’s clients who responded as follows to a question about what the most crowded trades are:
(BofAML)
Well needless to say, the narrative underpinning that trade took a “bigly” hit on Friday when Trump’s bid to repeal and replace the ACA crashed and burned.
But before you throw in the towel completely on that elderly, toupée’d pumpkin’s agenda and, by extension, on the reflation meme, you may want to read the following out Friday from Deutsche Bank who thinks there may be hope for you yet.
Via Deutsche Bank
There are naturally several avenues to policy error. The first and most prescient at the moment is failure to pass key elements of the Trump administration’s economic policy agenda. At the time of writing markets seem inclined to look past the ongoing healthcare debate. The CBO’s scoring of Trumpcare’s savings relative to baseline has fallen from $337 billion to $180 billion, and anyway these “savings” are probably more material in providing a piggy bank to fund vote winning amendments in the Senate debate than they are for funding corporate tax reform. Risk markets might flinch if Trumpcare fails to pass, but the far bigger deals for markets are tax reform and fiscal stimulus, and the experience of the Clinton administration suggests that an early misstep in healthcare won’t prevent the new administration from pivoting to other business. However, we note that the post election sell-off in bonds seems to presuppose a high probability that the administration will succeed in passing its legislative agenda, and that the measures will work.
Then again, that was written before the GOP health bill was pulled, so you know… trade accordingly.
And as for the President, well, someone should remind him that there’s always “hope”…
