Why We"re Buying Physical Gold with a $1700 Target

Originally on marketslant.com

For What it is Worth: We are buying Gold in our small family fund. This is a trade, not an investment. Potentially a much longer term trade for us than normal, possibly a 12 month hold as opposed to our 3 day positions. We are buying physical in quantities that will not need to be sold if we are wrong, thus no leverage. We will also be swing trading gold with an upward bias as our indicators dictate below $1260 or above $1306.

Target  picking is risky in an asset whose value is largely based on sentiment and prone to being "jawboned" into its proper place. But we believe for various reasons that if Gold does not pierce $1260 spot, its chances of a rally topping between $1450 and $1700 are strong over the next 12-18 months. The wide target range reflects the emotional factor in Gold"s behavior far outweighing supply, production costs, and its lack of fundamentals to measure using tools like EBITDA, PE, and cash flows. And our own analysis is corroborated from several different disciplines from whom we did not seek out to rationalize. It"s a trade, that"s all. But it"s a very good and very rare risk reward trade. it has set up right now. Further, it will either be violently and decisively confirmed (or negated) above $1306 or below $1260.

Why are we sharing this? That same question should be asked of Ray Dalio, Jeff Gundlach and others who announce they are bullish on Gold after they have  bought. Our own position is not relevant to the market overall and we do not need to market our tiny positions to create an exit strategy a la George Soros.  The premise for the trade happens so rarely its worth writing about, if for no other reason as an exercise in outsourcing our self-discipline on the trade. 

Vince Lanci for SKG

vlanci@echobay.com 

Here is how  we came to be this way.

Step 1: Volatility is Coiling

When trading short term periods, intraday and intraweek, we use a volatility system for alerts to incipient movement. We risk 1 to make 2 and move  on when wrong. It works about 50% of the time. it is net profitable. And best of all, positions that are in limbo are closed expeditiously. This is after all a volatility system. No vol, no position. It"s been cited here many times in the past. When it is right, it is very right. when it is wrong, you are out. Past posts and a 25 year track record of use bear this out from our active days.  The bottom of this post goes into more detail on its use.

What we never did at Echobay or its predecessor fund CIS Energy, was use it on long term charts. We certainly looked at them, but only for bias in shorter term trades.  Last month we took a serious look at our VBS algorithm on a monthly chart. Here is what we found:

Updated from : Gold Macro Analysis: A November to Remember

Gold has a  tremendous risk reward setting up above $1306 or below $1260..... which way from there is not known but can be handicapped once either number is breached

for a nexplanation of VBS see bottom Appendix

Step 2: How Equity Funds Play Gold

Portfolio managers at large equity funds who have contributed here anonymously use systems that advise them when being in cash as opposed to long stocks is prudent. What is also known is that funds like these  punt gold positions with their discretionary in-house money for fun.

They use similar systems for entry and exit, and never risk much in their positions. Gold is a hobby to these guys. As a result, they like to buy and walk away with long term trade orientations and firm stops. This means using long  term moving averages to avoid noise. We know this is true.  And here is an example of how that type of positions is implemented:

 In a recent interview a vocal critic of the Gold industry explained why he was buying Gold

…Gold is poised to close above its 12-month moving average for the second straight month. Going back to 1970, the average monthly return for gold following a close above the 12-month moving average is 1.47%. The average monthly return following a close below the 12-month moving average is -0.15%.

If you used the simplest of trend-following methods, investing in gold when it was above its 12-month moving average, and going to cash when it is below, the results would have been far better than just buying and holding gold. He continues:

The chart below shows when you would have been invested in gold and when you would have been out. Granted, prior to GLD, this could only have been done with futures contracts, or gold bullion, with the former adding a degree of leverage that I would not have been comfortable with, and the latter adding a degree of paranoia that also would have made me uncomfortable.

Full post : Vocal Critic Explains Why He is Buying Gold

About Physical vs. ETF: While we agree with the rationale behind GLD vs futures if you are trading and not investing, we feel for multiple reasons the physical gold market is going to open up and become a serious competitor to ETF allocations within 12 months. Specifically, blockchain products are coming,  and if properly implemented as a pipeline, owning physical gold not held in trust by a GLD custodian will be as easy as clicking a mouse. You will buy and sell physical Gold that will be yours and verified via the blockchain system.

So for us, physical gold now has the benefit of increased  liquidity on the horizon, which means increased transactions and exposure. Which ultimately means decentralization of the Gold market from a few large firms to grass roots stackers, owners, and value preservers. We view emerging technologies as putting physical assets in a position to  have their true value unlocked. Whether that be the tea farmer in India who can"t currently get a loan on his land due to government rules, to Silver whose value is somewhat disconnected from its  price. The effect will not be unlike when a private company goes public. Accessibility and liquidity creates safety and increases demand. Owning physical metals is like owning a beneficiary of technology down the road.

Monthly Chart Through July 2017 using the 12 Month MA described above

 

Step 3: Optimizing the Simple 12 month MA Tool

by optimizing the MA with one factor we back tested greater successes when in trades. Conversely, we were also in less trades. On balance it was a wash. But right now the employed filter says the 12 Month MA has bigger upside than the average if profitable at all. A rare chance to buy close to the level the fund punters did with a statistical chance of greater profits than the  1.47% monthly average  generated by the original backtest.

Updated and Optimized by the Author

 

The chart below shows the hypothetical results from each of the 30 exits following an entry (going back to 1970). Using these rules would have resulted in a loss two-thirds of the time. But as you can see, the losses have been relatively shallow, not exceeding 10%, while the gains have been good to extraordinary.

Step 4: Using VBS for Confirmation of Direction

Simply put: If we get a VBS signal trigger when $1306 trades, a decision must be made to add, sell, or hold based on the data that comes with the signal. If we get one on a $1260 print, the same must be assessed. 

 

Step 5: Actions

1. We are buying Gold now based on the "Fund Finder" signal with a monthly stop out below the yellow line in that chart above.


2. $1306- we will consider adding a shorter term amount in a rally if the monthly VBS is triggered higher


3. $1260-  we will consider either adding physical, or selling paper Gold for swing trading purposes if the VBS is triggered lower.


4. Per #1- we will close or hedge the first physical purchased on a monthly settlement below $1244 - the wide berth on monthly exits necessitates no leverage 

 

Bonus: Moor Analytics comes to a similar conclusion from a different perspective.

Moor Analytics: Gold Downside May Finally be Exhausted

Within the overall bearishness I noted that a possible area of exhaustion for this move down from 13624 comes in at 12732-644.  We basically held this, but with a $1.6 violation, and rallied to 13084 before rolling over and rejecting from it again (although this time down the 12628 was simply support, not exhaustion)

And Michael"s most recent weekly report of Nov. 10th

Via Moor Analytics:

I would note that we broke above a well-formed macro line in the week of 8/7 that came in at 12629. The

break above here projects this upward $183 minimum, $501 (+) maximum—the maximum to be attained likely within 9-12

months. This line comes in at 12357 today. I am late to the game on this, but we were only $18 from the original breakout

when I mentioned this, and have a lot of room to go in the projection.

 

Appendix

 

What is VBS?

• Volatility Based Risk Reward Generator

+ Originally developed as an alert to when the risk of being short implied volatility is larger than being long it, and vice-versa

+ It is a probability model that handicaps risk reward

+ As a by-product of its original purpose, it gives risk/reward scenarios in market direction. 

+ Due to its accuracy in predicting volatility expansion, directional applications are right or wrong quickly and is very useful in efficient use of capital

 

How VBS Works

• Time is precious, Price is noisy, Volatility is less so.

+Volatility is less noisy than price, therefore more reliable as an indicator. 

+Volatility cycles more cleanly and  can be seen to "inhale and exhale" when viewed graphically with Bollinger Bands

+VBS is based on several relationships between historical and implied volatility  across different time frames

+ It can  be applied by traders on any time frame

 

VBS and Direction

• It doesn"t predict price, only speed of movement

+It gives non-directional alerts and was initially developed for optimizing option portfolio risk.

+While not predictive directionally, VBS gives as a by-product excellent risk-reward setups for directional plays

 

VBS Process

• Radar, Alert, Trigger, Entry, Exit

1. Radar- VBS generates 2 prices, one above and one below current prices for a "breakout" in market volatility 


2. Alert- One of the prices is breached and closes its bar/ candle beyond that price level.


3. Trigger- Real volatility will expand
   
   • Market direction does not have to continue in the direction the price in #1 was broken
   
   
   • volatility based risk- reward prices are generated for directional use. I.E. Risk 1 to make 2
   
   


4. Entry- using the  VBS risk/ reward generated levels, a decision is made to either go with the directional trend, against it, or do nothing
   
   • The trigger gives 2 bites at the apple if the trader so desires.
   
   
   • In "first way, wrong way" scenarios reversal levels are generated (N.B.- our preference is to not play the reversal and have left money on the table in favor of the trauma of being "chopped up". if compelling, we have used options to remain in the game on reversals)
   
   


5. Exit- is either from a stop-out, a profit capture, or a time limit
   
   •  Stop-Loss- are generated by VBS and adhered to religiously. Profitable trades trail stops higher based on expanding volatility
   
   
   • Profits- exits can be subjective, we prefer taking 90% of position at target and leaving a tail if the VBS is not signalling Vol is overbought
   
   
   • Time Exit- trades  that are neither profitable  nor stopped out are exited  in 3 bars/ candles. The signal is designed for quick confirmation / rejection of the trigger
   
   

Good Luck

About the Author: Vince Lanci has 27 years’ experience trading Commodity Derivatives. Retired from active trading in 2008, Vince now manages personal investments through his Echobay entity. He advises natural resource firms on market risk. He pioneered and executed the Nat Gas EOO arbitrage trade of 2006 to 2008, netting over $90MM for a NYC hedge fund before retiring. Over the years, his expertise and testimony have been requested in energy, precious metals, and derivative fraud cases. Lanci is known for his passion in identifying unfairness in market structure and uneven playing fields. He is a frequent contributor to Zerohedge and Marketslant on such topics. Vince contributes to Bloomberg and Reuters finance articles as well. He continues to lead the Soren K. Group of writers on Marketslant.

vlanci@echobay.com 

Gundlach Warns "The Order of The Financial System Is About To Be Turned Upside Down"

"I"m not a big fan of bonds right now," may seem like an odd way for the so-called Bond King to begin, but in an audience at Vanity Fair"s Establishment Summit, DoubleLine"s Jeff Gundlach told Bethany McLean, "I haven’t been really [a fan of bonds] for the past four years, even though I manage them, and institutions have to own them for various reasons."

Gundlach urged investors to be “light” on bonds.

As Vanity Fair"s William Cohan reports, Gundlach admitted “I’m stuck in it,” of his massive bond portfolio, adding that interest rates have bottomed out and been rising gradually for the past six years.

Gundlach said his job now, on behalf of his clients, “is to get them to the other side of the valley.”

When the bigger, seemingly inevitable hikes in interest rates come, “I’ll feel like I’ve done a service by getting people through,” he said.

 

“That’s why I’m still at the game. I want to see how the movie ends.”

But it can’t end well. To illustrate his point about the risk in owning bonds these days, Gundlach shared a chart that showed how investors in European “junk” bonds are willing to accept the same no-default return as they are for U.S. Treasury bonds, pointing out that this phenomenon has been caused by "manipulated behavior" by central banks.

European interest rates “should be much higher than they are today,” he said,

“...[and] once Draghi realizes this, the order of the financial system will be turned upside down and it won’t be a good thing.

 

It will mean the liquidity that has been pumping up the markets will be drying up in 2018...

 

...Things go down. We’ve been in an artificially inflated market for stocks and bonds largely around the world.”

“My job is to find scary things,” Gundlach told McLean...

“My critics say, ‘You find seven risks for every one that exists.’ Guilty. That’s my job. My job is to try to find out what can go wrong, not cover my ears and hum. It’s better to keep your eyes open.”

Trump Expected To Announce His Pick For Fed Chair In Next Two Weeks

In the latest update on Trump"s search for the next Fed Chair, Reuters reported that the search has narrowed down to 5 finalists - Yellen, Warsh, Taylor, Powell and Cohn (condolences to Jeff Gundlach: his dark horse candidate, Neel Kashkari did not make the cut) - and that after meeting Yellen on Thursday, Trump will have discussed the Fed job with all five candidates. More importantly was the news that Trump is expected to announce his decision for next Fed Chair in the next 2 weeks, before he leaves for his Asian trip on November 3.

• YELLEN, WARSH, TAYLOR, POWELL AND COHN ALL CANDIDATES FOR FED CHAIR -WHITE HOUSE OFFICIAL


• FED CHAIR SEARCH NOW NARROWED TO FIVE FINAL CANDIDATES, WHITE HOUSE OFFICIAL SAYS


• AFTER YELLEN MEETING, TRUMP WILL HAVE DISCUSSED FED JOB WITH ALL FIVE FED CANDIDATES -WHITE HOUSE OFFICIAL


• TRUMP EXPECTED TO ANNOUNCE FED DECISION BEFORE HE LEAVES FOR ASIA TRIP NOV. 3 -WHITE HOUSE OFFICIAL

Yesterday, the USD and bond yields turmoiled briefly following news that Trump had warmed to the candidacy of San Fran professor John Taylor, father of the Taylor Rule and advocate of rules-based monetary policy, and who is widely perceived as a mega hawk. The news sent the USD surging and hit bonds.

That said, Taylor"s hawkishness appears to have worked against him, and after surging to 2nd spot on Predictit yesterday, Taylor was tumbled to 4th spot this morning.

That said, Taylor"s hawkish reputation may be unwarranted. As SocGen"s Kit Juckes wrote this morning, what rate the Taylor Rule indicates is dependent on a variety of assumptions. To wit:

President Trump is reported to have taken away a favourable impression of John Taylor after he met the Stanford University economist and inventor of the ‘Taylor Rule". As the President ponders who to appoint as the next Fed Chair, he now only has Janet Yellen to meet with, and Professor Taylor is the new market favourite. That, in turn, has given the dollar a bit of support and sent yields a bit higher as everyone contemplates what the Taylor Rule would imply for monetary policy. It"s generally concluded that a rules-based approach would deliver higher rates faster than we would see under the current policy framework.

Anyone armed with a Bloomberg terminal can type in TAYL GO and see where a Taylor rule estimate of appropriate rates is, and if they want, they can play with the critical elements of the rue - the estate of ‘neutral" real rates, NAIRU, and the inflation target. On the basis of a 2% neutral real rate, and a 4% NAIRU, the Fed is a long way behind the curve, which may be reason enough to think that a Taylor Fed would be more hawkish. On the other hand, lower the NAIRU (which may be reasonable given what we"ve seen from the labour market data in recent years) and you can get that estimate down. A 3% NAIRU throws out a 1.5% Funds rate, for example. And if Professor Taylor really wants to fine-tune his rule, he can head down the road from Stanford to the San Francisco Fed, 36 miles away, and have a chat with Stanford alumni and head of the San Francisco Fed, John Williams. He developed an estimate of neutral rates with Thomas Laubach, which moves over time and is currently at -0.2%. See Professor"s comments on a debate about that here . Plug Williams-Laubach"s R* into Bloomberg"s TAYL function with a 4% NAIRU and rates ‘should" be 0.5%. Now cut NAIRU to 3% and we"re at -0.75%. By way of indication, I"ve plotted some variants of this below, though I haven"t adjusted the Wiliams-Laubach R* all the way through the time series so they are only relevant in the recent past. The lesson is clear however - the rule"s just a rule, it"s how it"s used that matters.

Choose your rule - but neither R* or NAIRU are necessarily constant through time

For now, however, Taylor"s hawkish reputation precedes him, and - for a president who realizes he needs rates as low as possible for as long as possible - that will hardly boost Taylor"s application. In fact, as we noted yesterday, the most likely outcome at this point is that Trump simply asks Yellen to continue for one more term.

Did China's Bronze Swan Just Arrive? Copper Inventories Crash Most In History

Buyers withdrew more copper from the London Metal Exchange’s global warehouse network on Wednesday than at any time since daily records began in 1996, extending a 19-day drop.

As Bloomberg notes, while the net decline in percentage terms was also the biggest since the height of China’s raw-materials boom in 2006, some have warned against reading such moves as an end to a years-long supply glut. A tug of war between financial traders with opposing views of the market has led to sharp swings in metal moving in and out of storage in the past year.

However, stockpiles also slumped 8.2% on the Shanghai Futures Exchange, which is notable because last year we saw the London and Shanghai inventories see-sawing (up in London, down in Shanghai, and vice versa)...

A question that emerged is what China is spending all this newly created money on. One answer emerged overnight when Bloomberg reported that after tumbling in the first half of 2015, copper inventories at the Shanghai Futures Exchange had been steadily rising, and in the most recent week soared by 11% to an all time high of 305,106 tons.

At the same time reserves at the London Metals Exchange declined for 11 days to the lowest level in more than a year, in other words China is shifting idle inventory from Point A to Point B.

But, this most recent withdrawal surge (the largest in history) suggests a sudden failure of the long-running commodity "collateralization" transaction - or CCFD - regime implemented in China years ago, as described in this post and summarized in the chart below...

Copper, as China pundits may know, is the key shadow interest rate arbitrage tool, through the use of financing deals that use commodities with high value-to-density ratios such as gold, copper, nickel, which in turn are used as collateral against which USD-denominated China-domestic Letters of Credit are pleged, in what can often result in a seemingly infinite rehypothecation loop (see explanation below) between related onshore and offshore entities, allowing loop participants to pick up virtually risk-free arbitrage (i.e., profits), which however boosts China"s FX lending and leads to upward pressure on the CNY.

And sure enough, we have seen USDCNY surging in recent months... (even if the RMB basket against global currencies has stabilized)

An example of a typical, simplified, CCFD

In this section we present an example of how a typical Chinese Copper Financing Deal (CCFD) works, and then discuss how the various parties involved are affected if the deals are forced to unwind. Exhibit 3 is a ‘simplified’ example of a CCFD, including specific reference to how the process places upward pressure on the RMB/USD. We believe this is the predominant structure of CCFDs, with other forms of Chinese copper financing deals much less profitable and likely only a small proportion of total deal volumes.

To summarize, Goldman notes that these shadow banking vehicles - CCFDs - involve a long copper physical positions and a short futures position on the LME.

And so, the current crackdown on leverage in the system by Chinese authorities may be forcing unwinds of the CCFDs - thus putting upward pressure on Copper futures (unwinding short positions) and selling physical copper (which would mean procuring the physical metal before passing it on). These are exactly what we are seeing in the market currently.

So is this the bronze swan?

*  *  *

Barclays has also called the copper rally overhyped, while Bank of America Merrill Lynch said it’s the metal most at risk of a reversal, with the optimism of investors in financial futures disconnected from slow conditions in the physical market.

“When you look at the state of the refined copper market, you certainly question why prices have risen so significantly,” Snowdon said by phone from London.

And finally, bear in mind that the lagged response to China"s credit impulse is about to hit base metals...The rise and fall in China"s credit impulse that has been so highly correlated (on a lagged basis) with copper for the last eight years...

However, as one analyst noted,

“Getting short in any base metal is risky right now when you have this broad positive macro theme and increasing investor participation, particularly in China’s onshore market."

“This is probably one to stand back from and wait for Chinese macro sentiment to turn.”

And finally, bringing the narrative back to American shores, DoubleLine"s Jeff Gundlach tweeted recently about the "Copper/Gold ratio soaring to the high of the year!"...

Adding

"Not good news for the "1.50% 10 year" crowd. Neither is 10 year Bund holding above 50 bp."

If China"s legged credit impulse is about to have its peak effect on Copper (as we showed above) then perhaps, just perhaps, the real pain trade (given the surging shorts in T-Bonds), is a 1.50% 10Y yield after all... driven by a plunge in copper prices.

How To Hedge A Near-Term Market Shock: Here Are The Best Trades

As we showed earlier today, last Thursday"s unexpected, historic VIX explosion, driven by a surge of geopolitical worries about North Korea, and subsequent collapse was remarkable in both how fast and furious it was both on the way up and then, on the way down.As Bank of America said "both the spike in vol and the speed of its retracement were almost unmatched."

The move was also unprecedented in the sheer volume of VIX-related products - futures, options and ETFs - that participated in the surge higher as thousands of vol sellers suddenly scrambled to cover their positions (even if they were ultimately replaced with a new set of vol sellers). As BofA calculated, "volume in VIX-linked products reached an all-time high" with volume in VIX call and put options reaching a $250M
vega. VIX futures also had a record volume day with $850M while VIX ETP volumes hit $830M.

 

In retrospect, the biggest surprise about last week"s move - especially considering the loud warnings by famous Wall Street names such as Jeff Gundlach and Howard Marks predicted such a move - is how many people were taken by surprise by it. Or maybe they were not surprised, but just did not want or know how to hedge.

As Bank of America"s Benjamin Bowler writes, "most people ignore extreme risk as it’s simply too hard to price." One possible reason is because deciding whether to hedge tail risks is difficult not only because of the challenge of estimating the probability of a “rare event”, but it’s also compounded by the difficulty of gauging the size of the shock, if the event occurs. This is likely why a majority of cross-asset volatilities remain near historical lows despite the threat of a nuclear conflict becoming most acute perhaps since the Cuban missile crisis in 1962, according to Bank of America.

And yet, if the events from last week demonstrated something, it is that just when there appears to be virtually no risk, is when the likelihood of a historic surge in volatility is greatest, as many experienced first hand last Thursday. Hence the need to hedge.

But what?  And using which product?

Because, as Bowler also shows when it comes to discounting the probability of the next severe market shock, virtually every derviative product has a different perspective. As the strategist notes, "the decision about whether it’s rationale to hedge is really a matter of looking at the price of tail insurance embedded into option markets and asking if the probabilities they assign are “fair” or not." As he further writes, when it comes to predicting what the next "severe tail event" could look like, "we find that not only are some markets like Gold pricing in a very low probability of Korean risk escalation, there are significant differences across assets in terms of what they imply about potential risks."

The chart below shows how historical worst 3M drawdowns since 2006 are priced by 3M 25- delta options across asset classes; hedges that are most underpricing their historical drawdowns are at the top and those most overpricing their tails are at the bottom. What the chart shows is that gold call options still imply less than a 1 in 100 chance of a severe tail event over the next month, despite being among the most reactive assets to rising Korean tensions last week. With record low Gold vol slaved to record low real rates vol, this represents a loose anchor which likely won’t hold in any significant geopolitical risk escalation. In contrast to gold, Nikkei is at the other end of the spectrum with options assigning over a 5% chance of a near term tail-event.

Looking at 3M 25-delta options, however, may not be the best measure of the price of “rare event” risk priced into options.

As BofA suggests, "to get a better understanding of this implied risk for six assets – Gold, S&P 500, NKY (Japan equity), KOSPI2 (Korean equity), UKX (UK equity) and SX5E (European equity) – we estimate what options are pricing into their extreme tails using the following methodology:"

• For each asset across its entire sample history, we identify the ten largest “vol-adjusted” drawdowns within 1-month periods. The reason for normalizing by volatility is that we have shown that while nominal asset drawdowns can significantly vary historically, vol-adjusted drawdowns are more evenly distributed. In other words, the probability of a 1-day drop in the S&P 500 equivalent in magnitude to the 1987 US stock market crash (-21%) is virtually zero at today’s low vol levels. So for each historical drawdown, we adjust for the prevailing vol level and assume we were to see a similar “sigma-drawdown” today.


• We then compute the probability that options are assigning to markets falling to (i) their 10th worst historical drawdown and (ii) the average of their 10 worst drawdowns in each asset (as shown in Chart 10).

BofA"s analysis confirms that Gold is indeed pricing in the smallest probability of a “tail event”. The implication also is that should a "tail event" occur, the return from a gold-based hedge would be the one with the highest return.  Here are the details:

• As implied from Gold (GLD ETF) options, the probability that Gold rallies over the next month by 10.3% (equivalent to the 10th largest vol-adjusted rally in Gold’s history) is 1.7%. The probability that Gold rallies by 14.6% (equivalent to the average of the 10 largest vol-adjusted rallies) is a mere 0.7%. This suggests GLD calls are implying less than a 1 in 100 chance (1 out of 143) of its average historical tail event occurring in the next month.


• At the other end of the spectrum is NKY, where options imply the probability that Japanese equities fall by 8.2% (10th largest drawdown) over the next month is 6.1% and the probability they fall by 10.4% (average of 10 largest drawdowns) is 5.1% (1 in 20 chance).

In other words, just between gold and Nikkei options, the "priced in" probability of a crash is either ~1% in the case of gold, or 5% in the case of the Japanese Nikkei.

What about S&P 500 puts? As the chart above shows, they are currently pricing in the second-highest level of  tail risk after NKY, following the strong rise in S&P skew last week. The probability that US equities fall by 7% (10th largest drawdown) over the next month is 4.5% and the probability they fall by 8.65% (average of 10 largest drawdowns) is 3.1%.

* * *

Why is gold such a great hedge to future volatility? One possible explanation for the relative attractiveness of gold-based hedges hinges on gold’s optionality being historically depressed. This has primarily been driven by realized volatility which has been steadily declining since the gold rally in Q1-16 and is now at multi-year lows (Chart 11). An important force behind gold’s declining volatility is real rates volatility.  Indeed, real rates have a traditional relationship with gold through the channel of rational investment decisions, whereby investors measure the relative attractiveness of gold by how much they can earn elsewhere. As interest rates rise, so does the opportunity cost of holding a non-interest bearing asset such as gold.

While the relationship is not linear as not all real rate environments are created equal, and other important factors – such as the USD – impact underlying price dynamics, never before has this relationship has been so strong (see Chart 12). Importantly, real rates volatility itself has fallen to levels unseen since the start of the 2000s. This in turn has caused gold volatility to fall to ultra-low levels as correlation between gold/rates volatilities recently climbed to multi-year highs (see Chart 13).

* * *

What are the conclusion? BofA"s analysis reveals that for those "hedging" an imminent market crash (over the next month) should be aware that the payout ratios of “tail options” is highest for Gold, and lowest for NKY and SPX.

So, for those who believe the above implied probabilities are too low relative to the potential geopolitical risks at hand, buying far out of the money “tail options” may be the best trade. While there is more art than science to deciding on precise strikes and maturities, however, Table 2 below illustrates payout ratios for these six markets assuming 1M options are struck at the 10th worst vol-adjusted drawdown, but that markets fall to the average of their 10 worst drawdowns. In other words, if we get a shock that is worse than the 10th worst historical event but equal to the average of the 10 worst, what is the payout relative to cost of the tail insurance purchased today?

As shown in the table above, deep out of the money GLD calls would offer 56 to 1 payout ratios with this methodology, far more than any other asset, followed by UKX (35 to 1), SX5E (25 to 1), KOSPI2 (9 to 1), SPX (6 to 1), and NKY (5 to 1).

Finally, some parting words from BofA:

We see the escalation of ongoing geopolitical tensions as a very plausible candidate for propelling both rates and gold volatility higher as investors flee to Treasuries and gold (both perceived as ‘safe haven’ assets). Indeed our rates strategists recently recommended accumulating US rate volatility in anticipation of a potential political risk-induced risk-off in September.

Morgan Stanley: "Well, That Escalated Quickly"

"Well, that escalated quickly."

That"s how Morgan Stanley"s chief cross-asset strategist Andrew Sheets summarizes events in the last week in his latest Sunday Start note, in which he describes how following one of the calmest stretches for stocks since the 1960s, an escalating war of words with North Korea hit late summer markets priced for relatively little vol with the result sharp and sudden: a 70% rise in the VIX index over three days, a 2% drop in global equities, and more than a few holidays disrupted. Fear not, though, because according to Morgan Stanley, whose outlook on the S&P is one of the most bullish on Wall Street, views last week"s events "as a standard equity correction within an ongoing bull market." With volatility bearing the brunt of the repricing over the last several days, that’s where some of the most interesting changes lie.

And while Sheets lays out his reasons why the bank"s advice to clients is just to BTFD - or in the context of N. Korea, BTFAONW - Morgan Stanley does caution that things could get serious if the one scenario many - most recently Jeff Gundlach - have been dreading, namely the rise in volatility, becomes self-fulfilling, with investors selling as volatility rises and markets move lower, driving more of both. As Sheets writes, "for this risk, I’d be watching if new lows in the S&P 500 are confirmed by new highs in the VIX. This scenario is also scarier if realised volatility can stay near implied (if it doesn’t, implied volatility can fall, reversing the cycle). As of noon Friday, 3m S&P 500 was priced for a daily move of 0.8% and EuroStoxx was priced for a daily move of 0.9%."

Finally, while the bank remains optimistic on equities, it adds that there is an exception: "we would not ‘buy the dip’ in US credit, where [we] see more risks, given weaker fundamentals, expensive pricing and limited upside in exchange for swimming against the recent tide."

Here is Sheets full Sunday Start note:

Well, That Escalated Quickly

Following one of the calmest stretches for stocks since the 1960s, an escalating war of words with North Korea hit late summer markets priced for relatively little vol. The result was sharp and sudden: a 70% rise in the VIX index over three days, a 2% drop in global equities, and more than a few holidays disrupted.

While the ‘why’ is worth discussing, the more pressing question is what happens next. For several reasons discussed below, we’d view this as a ‘standard’ equity correction within an ongoing bull market.

With volatility bearing the brunt of the repricing over the last several days, that’s where some of the most interesting changes lie.

Drawdowns happen. Since 1929, there’s always been a 30% chance that a 5%+ drop will occur at some point over the following three months. The S&P is off less than 2% from its all-time high, and (still) hasn’t seen a 5% correction since mid-2016, the longest such streak since 2004. Whether you’re bullish or bearish, I’d imagine there’s wide agreement that something like this would happen eventually. The bigger question is what’s driving the move. We don’t see it driven by a shift in fundamentals.

Let’s start with growth. Our economists continue to see solid global growth (4.3%Q SAAR in 2Q), which we believe will help to boost global equity EPS by double-digits this year. These views didn’t change in the last week, where, if anything 2Q DM earnings continued to surprise to the upside. If that’s right, it represents a key difference from the larger August drawdowns of 2011 and 2015. Watch China industrial production on Monday, where Morgan Stanley expects 7.5%Y versus consensus at 7.1%Y.

Policy also remains supportive, with real policy rates across the G3 still deeply negative. While there’s always a risk that the Fed’s upcoming conference in Jackson Hole will have a hawkish tone, that’s not our expectation and, if anything, our economists think the risk is tilted to Draghi sounding mildly dovish, given recent EUR strength. We forecast inflation to stay well below target across the G3 for another 4-5 months on our forecasts, providing flexibility to move policy slowly. Bigger risks loom next year, when higher inflation may take away this optionality.

Geopolitics is also fundamental. Relative to the five-year average, Korea CDS is 3bp higher while KRW is 3% lower. Korean stocks remain up 16% YTD, although volatility has almost doubled. These indicators are worth watching, but in aggregate it is hard to say they’re discounting an alarming scenario.

So, if it’s less about fundamentals, maybe recent moves are more technical. August is a month when more investors are out (or about to be out), lowering risk appetite and thinning markets. Even if more people were in, Korea is a legitimately hard risk to discount. And, as noted by Christopher Metli, in our Institutional Equity Division, there was an unusually high number of volatility shorts in the market heading into this week, which may help to explain (some of) the large swings in VIX. These moves have pushed the S&P 500 skew to its steepest levels on record.

That leaves two paths. One is that the rise in volatility becomes self-fulfilling, with investors selling as volatility rises and markets move lower, driving more of both. For this risk, I’d be watching if new lows in the S&P 500 are confirmed by new highs in the VIX. This scenario is also scarier if realised volatility can stay near implied (if it doesn’t, implied volatility can fall, reversing the cycle). As of noon Friday, 3m S&P 500 was priced for a daily move of 0.8% and EuroStoxx was priced for a daily move of 0.9%.

The other path, more likely in our view, is that this turns out to be a more ‘normal’ correction. The Morgan Stanley Global Risk Demand Index (GRDI*) has fallen to -3.6, an ‘oversold’ level seen only a handful of times over the last eight years. The volatility term structure has inverted, which has also tended to be a reasonable indicator of elevated fear. And we think there is capacity to add exposure eventually, especially in the US, where Prime Brokerage tells me net leverage is in the 20th percentile. Given the steepness in skew, calls may offer some of the most attractive ways to be brave in the US, while put spreads may offer the best value for those looking to hedge what is still a relatively mild pullback. Overall, our positioning would remain constructive.

Is there an exception? We would not ‘buy the dip’ in US credit, where my colleague Adam Richmond sees more risks, given weaker fundamentals, expensive pricing and limited upside in exchange for swimming against the recent tide.

Gundlach's Total Return Bond Fund Hit With 9th Straight Month Of Outflows

While Jeff Gundlach has been engaging in an odd subtweeting campaign on Twitter over the past week with an unnamed media outlet that is allegedly being used by a similarly unnamed Doubleline competitor to accuse Gundlach"s fund of doing poorly and is suffering outflows, something the "bond king" has said is a "false narrative"...

... he has done everything in his power to publicize that DoubleLine is in no way in peril, or in need of funding. Just yesterday, in an interview with Bloomberg"s Erik Shatzker, Gundlach said that he is content with the size of his fund, which he does not want growing too large, and may soon turn new money away:

“Gundlach is taking a similarly conservative approach to building his eight-year-old firm. While some competitors embrace the mantra “size matters,” he believes there’s a limit to how much DoubleLine can manage well and says the firm may stop marketing altogether once assets reach $150 billion, up from about $110 billion today.

‘I’ve actually been turning money away in our institutional business,’ Gundlach said. ‘I don’t want to manage $500 billion. I don’t really want to manage $200 billion.’... “I don’t want one $150 billion fund, I want 10 $15 billion funds. A diversified business,” Gundlach said in the interview. “We lose business because our fees are too high and I say, ‘Fine, that’s a way of regulating growth.’”

“Bill Gross once managed a single fund with $293 billion in assets, the Pimco Total Return Fund. By comparison, Gundlach, who co-founded DoubleLine in 2009, said he’s debated whether to close the $54 billion DoubleLine Total Return Bond Fund, the firm’s largest, to new money.”

The statement echoed what Gundlach said in a tweet from August 2: "DoubleLine Facts: All time high AUM, revenue, headcount. Returns good-to great across funds. CEO never berates employees. Boycott fake news!"

It now appears that the reason for the recent din over DoubleLine - or rather Total Return Bond Fund - AUM is that Gundlach was anticipating the latest Morningstar fund flow data, reported by Reuters, according to which investors pulled another $200 million from Jeffrey
Gundlach"s flagship Total Return Bond Fund in July, extending the outflow streak that began in November to nine consecutive months. So far this year, the fund has posted outflows of $3.6 billion, leaving it with $53.6 billion in AUM as of the end of
July.

As Reuters writes, "the withdrawals are notable given that other bond funds are swimming in new cash from investors and at a time when the DoubleLine fund"s performance has been strong.

Some $203 billion flowed into bond funds in the first half of 2017, and bond funds overall have not recorded a single week of outflows all year, according to the Investment Company Institute, a trade group.

The outflows are odd in the context of TRF"s YTD outperformance: "DoubleLine Total Return Bond Fund"s lower-cost institutional shares were up 3.2 percent this year through Tuesday, beating its benchmark, according to data from Thomson Reuters" Lipper research unit." Preempting the news, Gundlach in a tweet early Wednesday said that DoubleLine is a top-ranked fund company by net cash inflows this year through July.

YTD thru July, DoubleLine ranks 19th out of 747 Fund Families in terms of Net Cash Inflows. Looks to me DBL Funds are growing significantly.

— Jeffrey Gundlach (@TruthGundlach) August 9, 2017

Sure enough, while TRF is seeing outflows, the broader DoubleLine continues to take in cash: overall, the firm pulled $253 million into its mutual funds and ETFs during July and $2.5 billion this year, ranking 24th of 405 fund families, according to Morningstar data. A recent interview with Reuters may explain this discrepancy: Gundlach said DoubleLine was "trying to focus on our strategy: growing our other funds." He was referring to the SPDR DoubleLine Total Return Tactical ETF, DoubleLine Core Fixed Income Fund, DoubleLine Shiller Enhanced CAPE, DoubleLine Low Duration Bond Fund, DoubleLine Infrastructure Income Fund and DoubleLine Flexible Income Fund. Those six funds have attracted $5.8 billion this year, according to Morningstar.

"We are marketing our other funds and not DBLTX," Gundlach said. "We are accomplishing exactly what we planned."

Perhaps Gundlach is one of the few managers who actually means it when he says he does not want his fund to end up being too big: he has said repeatedly that he did not want to grow DoubleLine into a monstrous firm. He told Reuters in 2014, when DoubleLine crossed $60 billion in assets under management, that "most people think the definition of success is more. It"s gotta be more all the time. There"s a quality-of-life aspect and a way of maximizing the probability of success." He repeated the same again this week to Bloomberg.

It remains to be seen if there is anything more structural within DoubleLine to explain the outflows, or the explanation for Gundlach"s recent odd tweeting behavior.

In other news, Gundlach sounded a bearish tone and told Reuters, Bloomberg and CNBC that he expects volatility to spike, his "highest conviction trade", and gold prices to rise. He also said on Tuesday said he initiated an options trade designed to profit if market volatility ramped up. His timing may have been good: both the VIX and gold have been rising in recent days, although it is unclear if the trend will continue, considering the S&P closed unchanged despite the growing sound of war drums.

Low Volatility Will Make The Next 5% Drop In The Dow "Feel Like 1987"

The VIX has recently flirted with its all-time closing low, analysts worry that volatility has been so low for so long that analysts are worried that the next sizable negative shock will cause investors to panic and dump their holdings.

Other than a handful of selloffs over the past couple of years (Aug. 2015, Jan. 2016, June 2016), Federal Reserve-led easing has guided markets steadily higher since the crisis. As MarketWatch reports, The Dow hasn’t experienced a 5% drop since 2011, and before that a 5% drop hadn’t happened since 2008, when there were 9 such drops. The blue-chip index closed at a record high on Friday, leaving it just 200 points shy of 22,000. At this level, a 5% selloff would equate to a 1,100-point, one-day slide in the gauge - an eye-popping four-digit drop.

Art Hogan, chief market strategist at Wunderlich Securities, says the market isn’t prepared for a large selloff because "garden-variety" volatility has been largely absent from US stocks for the last year.

""I would say no because we’re out of practice. Your usual standard garden-variety volatility just hasn’t been around, and we haven’t seen it for 12 months," Hogan told MarketWatch.

"Quiet markets have been the norm and not the exception and I think a major pullback is going to feel a whole lot larger for lack of experience and the numbers are larger," he said.”

Hogan isn’t the first strategist to point out the market’s vulnerability to a sharp rise in the VIX. As Morgan Stanley’s Chris Metli said in a research note exploring what a “short vol unwind” might look like. Low volatility has produced a regime where the risks are asymmetric and negatively convex, so being prepared for an unwind is critical, since a 3% or 4% move in the S&P 500 can have a disproportionately large impact on the VIX as dealers and exchange-traded products rush to hedge.

According to Marketwatch and Dow Jones data, even a 2.5% drop in the Dow, adding up a 550-point decline, could rattle investors. Moves of this magnitude, while still relatively rare, are far more frequent, with 564 such moves occurring in the Dow since 1901. The most recent slump of this magnitude occurred on June 24, the day after the Brexit vote, when the Dow tumbled about 610 points, or 3.4%. There were three such moves in 2015. The S&P 500 is also long overdue for a major pullback.

As for the S&P 500, 61 of the past 67 years have seen at least one 5% drop, or 91% of all years, according to Ryan Detrick, senior market strategist, at LPL Financial.

"‘The inevitable 5% drop will be a shock to nearly everyone,’ Detrick said. ‘We’ve been historically spoiled so far this year, but as the economic cycle ages, we fully expect more volatility the remainder of this year and the likely 5% correction to take place as well,’ he said.”

Still, it’s important for investors to remember that while a 5% might “feel like 1987,” it’s necessary to “flush out the weak hands,” Detrick says.

“The important thing to remember is the Fed is still accommodative, earnings continue to improve globally, and inflation is contained - meaning any pullback could be a nice opportunity to add equity exposure.

Although a 5% correction might feel like 1987 to some of us about now, pullbacks and volatility are perfectly normal parts of bull markets and are needed to flush out the weak hands.”

Market luminaries including billionaire investor Howard Marks and Nobel Laureate Robert Shiller have warned investors to be cautious. According to Shiller’s CAPE ratio, a popular measure of equity valuations, S&P 500 valuations are at levels only seen twice before: in 1929 and 2000. Shiller said on CNBC Thursday that he “lies awake worrying” about how long this period of quiet will last. Doubleline Capital founder Jeff Gundlach said his fund bought up VIX calls when the index hit its most recent lows.

To be sure, investors are willing to pay a premium for protection. According to Bank of America, the market has never "trusted" the VIX as little as it does now, and has never before been willing to pay, and bet, more for upcoming imminent sharp moves.

Dr.Copper's False Hope - "We've Seen All This Before, Too Many Times"

Copper prices surged to the highest levels since May 2015 in the last few days, prompting the ubiquitous "must mean the economy is doing well" narrative from every hope-fuelled reflationist. There"s just one problem, we’ve seen all this before too many times.

The most recent spike in copper prices has been explained by the news that China may ban imports of some scrap metal, including copper, from the end of 2018, according to an industry association notice, which may lead to higher refined copper imports into the world"s largest consumer of the metal. As Reuters reports, the review of copper scrap imports is part of a broader crackdown by China authorities on imports of foreign waste as it looks to cut pollution from heavy industries to clear its skies.

The recycling branch of the China NonFerrous Metals Industry Association said on Tuesday that it had received a notice that at the end of 2018 imports of scrap metal including wire, motors and bulk scrap metal will be prohibited, according to a copy of an informal Association message sent to members of its WeChat group reviewed by Reuters.

"The market is reacting to the news about China banning scrap cables, scrap motor and other scrap metals from the end of next year, which could block a lot of copper supply into China," said analyst Li Chunlan at consultancy CRU in Beijing.

However, that narrative does not hold water...

Antaike, a metals research institute under the Association, said that the ban would likely affect less than 1 million tonnes of imports that market participants are speculating could be impacted.

That is because the type of scrap affected by the ban only accounted for about 300,000 tonnes of China’s total 3.35 million tonnes of scrap copper imports in 2016, it said in a report.

So Reuters resorts to Dr.Copper"s Economics PhD...

Metals were also supported by a better demand outlook from China after second-quarter growth beat expectations and the International Monetary Fund raised the country"s 2017 growth forecast.

But, just like it did in November of last year after President Trump"s election, Volume in Chinese copper contracts is massively outpacing Open Interest, suggesting this latest surge is as much speculation-driven as fundamental hope.

Perhaps there is another driver of copper"s rise?

The rise and fall in China"s credit impulse that has been so highly correlated (on a lagged basis) with copper for the last eight years...

Alhambra"s Jeffrey Snider has some excellent in-depth insight for the fallacies of Dr.Copper"s economic inisghts...

Copper prices are up very sharply today, igniting across markets a reborn “reflation.” Treasuries along with eurodollar futures have been stuck in anti-“reflation” for quite some time. Copper, on the other hand, is not just now breaking from the pack. Going back to May 9, this important economic indication has been so far steadily bucking the trend.

When we talk about Dr. Copper it is important to settle on terms. When the price surged way out of historical proportions back in 2005, it was assumed that was in relation to the US housing mania. But 2005 was the top of that bubble, not the start. Instead, copper was reacting to the other part of the eurodollar-driven global imbalance – EM construction, especially China.

The first of China’s so-called ghost cities was begun around that time, with Communist authorities shifting state investment toward urbanization at the fastest possible rate. From the perspective of 2005, continued rapid growth was expected indefinitely. The export/industrial engine of China’s economy required workers, meaning the migration of hundreds of millions of subsistence farmers out of the rural fields and into modern cities already awaiting them.

Thus, copper’s peak in early 2011 coincides with perceptions (including those relating to global money) about how many new “ghost cities” China might still have yet to build. If the global recovery after the Great “Recession” was to be delayed, the Chinese might not need in the foreseeable future much more by way of new construction. The price of copper is therefore in large part a proxy for China’s view of that paradigm (especially given copper’s role in construction finance as collateral).

That perspective had only dimmed through the “rising dollar” period as it was realized there was the nontrivial economic risk the world economy might not recover at all. Copper sank all the way back under $2 during the worst of the 2015-16 downturn the metal was no longer pricing as a recession.

“Reflation” in copper terms, therefore, is and so far has been about just what that might mean. In other words, how will the Chinese react to a truly changed economic paradigm?

One possibility is that authorities will be provoked to try to bubble their way out. Another is that the internal Chinese economy can replace as its center the once all-important manufacturing business (rebalancing). In both those possibilities there is required RMB. Any possible change in PBOC policy, public or not, can be a catalyst toward shifting baselines, low as they might be at this point.

Publicly the central bank is still neutral; in reality, CNY suggests something else; at least for RMB. The currency exchange rate has risen against the dollar more resolutely since Moody’s dared downgrade China’s debt back in May. But the start of CNY’s appreciation was May 9.

There really isn’t any other basis for copper’s behavior this far in 2017. Many if not most economic projections are still more favorable, but that really doesn’t mean all that much. The OECD, for example, raised its global trade outlook for 2017 and 2018 at its last update last month.

In November, their economic models projected $23.5 trillion in total world trade (volume) in 2017, and $24.3 trillion in 2018. As of June, those estimates were upgraded to $24.0 trillion and $25.0 trillion, respectively. A $700 billion upgrade for next year sounds terrific and surely substantial, but in context it is revealed as both a rounding error as well as a repeat of these intermittent bursts of upgraded optimism that always fail (“reflation”).

Even with minor improvement this year, the OECD does not expect it to last or more importantly to be lasting. Instead, they are projecting variations of all-around insufficient growth; some years, like this year, could be less painful than others, but stuck always way behind.

They project for China an even greater uptick in trade than the world in general. It is still not much more than a barely noticeable change, and is not expected to last much beyond 2017.

There aren’t a whole lot of new ghost cities required of the old Chinese economy in these figures (which are very likely the best case, given the history of the last decade where time and again the real economy consistently underperforms them).

It could be that copper investors, like those in global stocks, see only what they want in extrapolating a lot out of a very little improvement; turning a molehill of variable deficiency into dreams of a mountain of true recovery.

In that respect, central bankers and the media especially in the West have done little to deter such thinking (see: Mario Draghi, June 27).

That might be overthinking it too much. Copper prices really aren’t that far off the recent lows, like oil closer to that position than past highs. If last year the global economy seemed to warrant only a couple new Chinese ghost cities, then this year it might appear as if two or three more rather than the initially planned twenty could eventually be built. A positive RMB environment would seem to be the initial stage for it.

As usual, however, that all depends on even minimal growth levels from here being finally uninterrupted by (monetary) circumstances. We’ve seen all this before too many times, including as advised by Dr. Copper only a few years ago. From a low of just a bit over $3 in October 2011, copper at first surged ahead and then settled back into a volatile uptrend all the way until February 2013 – and the primordial conditions of what would be the “rising dollar.”

Copper, as many markets, is trying to investigate the possible upside scenario to what is global stagnation, malaise, or depression. We already know the downside, for China and all the rest.

*  *  *

And finally, bringing the narrative back to American shores, DoubleLine"s Jeff Gundlach tweeted about the "Copper/Gold ratio soaring to the high of the year!"...

Adding

"Not good news for the "1.50% 10 year" crowd. Neither is 10 year Bund holding above 50 bp."

If China"s legged credit impulse is about to have its peak effect on Copper (as we showed above) then perhaps, just perhaps, the real pain trade (given the surging shorts in T-Bonds), is a 1.50% 10Y yield after all...

Gundlach Warns Flatter Curve Is "A Concern For US Economic Growth"

Doubleline Capital founder Jeff Gundlach warned that the flattening yield curve could become a concern for US economic growth when two and three-year notes yield about the same, and the price per barrel of WTI crude oil plunges into the $30s, he said during a phone call with a Reuters reporter.  

The last time the spread between two- and three-year yields held below 10 basis points was around the time former Federal Reserve Chairman Ben Bernanke announced the beginning of Operation Twist and then QE3 in late 2012.

Gundlach, who doesn’t anticipate a recession in the near term – only a correction in US stocks over the summer – added that “there’s no hard data that you could point to that signals recession.” Typically, short-term bond yields are more sensitive when central banks raise interest rates.

Though, as Reuters noted, this doesn’t mean economic growth is exploding.

Known on Wall Street as the Bond King, Gundlach also said he is becoming more positive on international equities over U.S. stock markets because the Fed is raising rates with "quantitative tightening on top of it with its plans to shrink its balance sheet," according to Reuters.

"Lower CPI (Consumer Price Index) in the next couple of months will be a cold bucket of water for the Fed tightening dreams," Gundlach said. "Commodities are super weak, with the dollar down year-to-date, no less."

* * *

During his latest monthly webcast, Gundlach noted that the short-volatility trade is looking incredibly crowded, and said traders "should be raising cash today” so they can go long volatility - short the S&P 500 and take advantage of an impending correction.

"It"s a trade that"s made a lot of money and its very, very crowded, which suggests to me the days of low volatility are numbered," he said. We "probably won"t see it continue through year end."

Aside from an imminent vol spike, Gundlach also went off on a political tangent and summarized his views on the ongoing drama in DC, saying "the establishment: in Washington is trying to undermine Trump by running out the clock on his administration. “They’re really just trying to wait Trump out, trying to obstruct his agenda as much as possible,” Gundlach said quoted by Bloomberg. “Small change is what they’re looking for.”

He called the political charade taking place in DC “a sideshow or entertainment" and said the US political conflict is “rope-a-dope,” after the strategy used by Muhammad Ali to wear out opponents. It remains to be seen if the Democrats, or Trump, win this particular boxing match.

The Treasury yield curve flattened on Wednesday, with 30-year yields down two basis points, and two-year yields up one point. WTI, meanwhile, tumbled to $42 a barrel.

If you missed out on Gundlach"s presentation, you can read it in its entirety here: