2017-02-27 2pm EDT  |  #Trump #steak #crude oil #inflation expectations #bonds

While the whole world is buzzing about the colossal Oscars screw up, the MacroTourist is more focused on the stuff that really matters. Like the hard hitting news about President Trump’s weekend clandestine dinner sortie. The Donald tried to evade the press, but a shrewd reporter got the tip ahead of time and positioned himself in the booth close to the new President.

Now I might offend some people with this next comment, but I have to just come out and say it. I can’t hold back any longer.

At dinner, Trump ordered an aged New York strip and ate it with ketchup. Being a Canadian, I can live with the ketchup call. After all, Canadians are the highest consumers of ketchup per capita in the world.

In the Ketchup stakes, Canada leads with 3.1kg per head, followed by Finland (3kg), Sweden (2.7kg), the UK (2.4kg), Norway (2.3kg), Austria and the US (both 2.2kg).

I personally wouldn’t put ketchup on steak, but I have seen it done enough times, I have become somewhat immune to that abomination.

But ordering the steak well done? That I have trouble with…

Probably the best line I saw written about this was from Jezebel’s Rachel Vorona Cote who said, “Donald Trump eats his steak well done with ketchup, like a damn child.”

I realize these are some pretty incendiary, politically charged remarks I have just made, so if you happen to be a “cook it until it is shoe leather” eater, then I apologize. Please accept my prejudice as too many years on a trading desk. I know that excuse is bullshit. Kind of like your less-than-politically-correct grandfather - you understand where his prejudice comes from, but that doesn’t make it acceptable. I am aware of my problem, and I am trying to show more understanding for those who overcook their meat. It is a slow process, but I am working on it.

My compulsive obsession with how the leader of the free world orders his steak has put me behind schedule, so today’s post will be short.

Over the past few months, there has been a dramatic increase in inflation expectations. The Fed’s preferred market inflation gauge, the five year forward five year inflation swap, has risen from 1.3% last summer to 2%.

Now obviously the price of crude oil plays an important role in shaping inflation expectations. When the world’s most used energy source was cut in half in 2014-15, it was clear this would have a negative effect on inflation. It was no surprise that this coincided with the massive decline in the Fed’s 5y5y inflation index.

Yet have a look at the two series lately. Inflation expectations have rallied much more than crude oil.

There is nothing saying this relationship has to continue to trade so tightly. Inflation can go up without crude rocketing higher.

But it is interesting that a similar dynamic played out in 2015. At that time, inflation expectations got out ahead of crude, but then, as the Fed spoke too hawkishly, the US dollar rose, dragging crude oil lower along with inflation expectations.

I have been perplexed by crude oil’s ability to stay elevated amidst the record speculative longs and increased supply. I have watched in bewilderment as hedge funds have piled into long positions.

Maybe crude oil’s insatiable rise is actually not fully reflective of the general economic state of reflation. I guess this is partially the hedge funds’ bullish argument.

Yet I am sticking with my crude oil short. I wonder about the possibility of an accident. If oil does indeed roll over, then there will be a dramatic rally into fixed income as nominal inflation expectations come crashing down. Given that hedge funds are record long crude oil and equally short fixed income, the move could be explosive.

In that environment, the hedge funds’ P&L will look worse than Trump’s over done steak…

Thanks for reading,
Kevin Muir
the MacroTourist