CROWDED TRADES NEVER END WELL

2017-03-10 12pm EDT  |  #crude oil #bonds #eurodollars #front end of the yield curve

Remember a week ago when all the crude oil bulls told us how the massive net speculative position was nothing to worry about? And to be fair, for the longest time they seemed to be right. Crude oil prices were extremely sticky, refusing to budge from their elevated level.

Yet, seemingly out the blue, prices suddenly tumbled $4. The media will try to assign a reason for the decline, but there was no piece of news that was any more bearish than anything from the past couple of weeks.

Now to be fair, the gigantic net long position in crude oil was slightly more complicated than the headlines indicated. I wrote about the fact that although specs were record net long in terms of contracts, when measured in dollars, or percentage of open interest, the picture wasn’t quite so extreme. Yet I cautioned that all of the speculative optimism was a huge red flag (Re-evaluating Crude Oil Spec Positioning).

I am reposting a graph from that piece that shows the extended nature of speculative positioning.

Now fading a one way market based on over eager speculators is not for everyone. You’re almost guaranteed to look like an idiot for a while, and once it turns, everyone will claim it was obvious and they weren’t part of the herd leaning the wrong way. But the truth is that few catch the move because it is mentally so difficult to stand on the other side of the masses.

With that in mind, I present the next accident waiting to happen (and I realize you will most likely think me a knob for suggesting taking the other side of this trade).

Speculators are betting heavily that the Federal Reserve will continue raising rates. In fact, they have taken a net short position of over $2.5 trillion dollars of 3 month Eurodollar futures contracts.

And although the five year t-note future net spec position has been reduced in the past week, it is still sitting near record short levels.

I know fading the idea the Fed will not raise rates as quickly as the market anticipates seems like a fool’s errand. The US economy is the brightest star in a dimly lit sky. Trump will cut taxes, spend money on infrastructure and make America great again. Of course rates will need to be considerably higher under this scenario. Yeah, I get it…

I don’t know what the catalyst will be. Maybe it will be a terrible unemployment number. Maybe it will be a sell the news reaction to next week’s Fed meeting. I don’t have a clue.

But I know that shorting the front end of the US yield curve is a crowded trade. And if there is one thing that I have learned, it’s that crowded trades never end well…

Thanks for reading and have a great weekend,
Kevin Muir
the MacroTourist

PS: The ‘tourist is on vacation until March 27th. See you then!