After a review of the Jan. 18-21 market activity and macro news, DoubleLine’s Samuel Lau and Jeff Mayberry explain and explore how to trade volatility, particularly in light of their discussion in the last episode on the futures curve*, which is one way to trade the Volatility Index (VIX) (16:08). In their deep dive, they take a look at the history and methodology of the VIX (commonly referred to as the Fear Gauge) and how the index correlates to performance of S&P 500 Index options, what it means to short or go long volatility, ways to gain exposure to the VIX and how a sudden spike in volatility led to February 2018’s Volmageddon. 

In their recap of markets for Jan. 18-21 (2:07), no sector was spared from a sea of red. The U.S. Treasury yield curve flattened (4:21), with the 10-year down and the shorter end of the curve up. Commodities enjoyed a strong week (8:56), including gold. Bitcoin was down. After a fraught weekend of NFL playoffs and food-based headwear, next week’s events (34:57) will include housing price and PCE numbers, an advanced estimate of fourth quarter GDP and a much anticipated Federal Open Market Committee meeting. 

*MMM Episode 48: 7% CPI, Pricing in 4 Rate Hikes and a Primer on Commodities Futures
https://doubleline.com/podcast/mmm-episode-48-7-cpi-pricing-in-4-rate-hikes-and-a-primer-on-commodities-futures/

Monday Morning Minutes

MMM Episode 49: A Red Sea of U.S. Equities, BCOM vs. Bitcoin and How to Roll With Trading Volatility

After reviewing market and macro news for the week of March 21-25, DoubleLine’s Jeff Mayberry and Samuel Lau answer a listener’s question on how quantitative tightening (QT) could impact the 10-year U.S. Treasury yield (19:41) as well as the TIPS market, in which the Federal Reserve has a large footprint. Jeff and Sam look back at previous QT periods and note the accelerated pace of plans for interest rate hikes and balance sheet reduction in 2022. After discussing a pair of alliterative QT events, the Taper Tantrum and Powell Pivot (24:18), the duo reviews hiking cycles in 1984 and 1994 that Fed Chair Jerome H. Powell says resulted in economic soft landings (29:21), with the lack of inflation a key factor both times. Jeff and Sam conclude the segment with a breakdown of QT’s possible impact on the TIPS market and breakevens (33:29).*

The week of March 21-25 delivered a lot of action in U.S. soccer as well as a risk-on sentiment in the markets (2:05). The S&P 500 had a strong week, Fixed Income Land observed some curve flattening (3:18), and while commodities stayed strong (6:22), the nickel market remained reined in (7:42). The past week was relatively light on macro news (9:42); next week’s macro numbers will include home prices, JOLTS data and nonfarm payrolls (40:14).

*The following previous episodes contain more information on this week’s topic:

Real and Nominal Yield Curves
https://doubleline.com/podcast/monday-morning-minutes-recap-of-the-april-12-16-market-week/

What Is a Bear Flattener?
https://doubleline.com/podcast/mmm-episode-24-july-12-16-recap-question-of-the-week-and-outlook/

FOMC Guidance on Tapering
https://doubleline.com/podcast/mmm-episode-40-isms-big-isms-a-taper-pacer-and-powell-channeling-yoda/

MMM Episode 58: Hard Look at the Fed’s Rare “Soft Landings”

After reviewing market and macro news for the week of March 28-April 1, DoubleLine’s Jeff Mayberry and Samuel Lau – in the international spirit of the just-unveiled men’s World Cup draw – field a question from Charles, a listener in France, on whether we should be paying attention to the real U.S. Treasury yield curve over the nominal yield curve in the wake of the Federal Reserve’s balance-sheet expansion since the Global Financial Crisis and in the COVID-19 era (20:04)*. Charles also asks if the increased steepening of the real yield curve this year should spur the Fed to be more aggressive in hiking the target federal funds rate. Basically, Jeff and Sam seek to answer: Are things different this time? They say no. With help from the DoubleLine team, they discuss the Fed’s lack of control over the real yield curve, which is mainly shaped by the market (22:12), and the real yield curve’s use as an economic indicator (27:49). 
 
Jeff and Sam review a mixed March 28-April 1 market week as well as a rough first quarter, including the Agg’s worst quarter since 1980 (2:42). Their rundown of Macro Land includes some surprises, including home prices to the up side and personal spending to the down side, and more signs of a strong labor market (13:55). Next week will bring a chance to dig in to the minutes from the Federal Open Market Committee’s March meeting. This episode was recorded April 1, 2022.
 
*For more information on the U.S. Treasury yield curve, check out:
MMM Episode 52: Yield Curve Flattening as an Economic Indicator
https://doubleline.com/podcast/mmm-episode-52-yield-curve-flattening-as-an-economic-indicator/

MMM Episode 59: Real Yield Curve and U.S. Men’s Soccer – Are Things Different This Time?

After market and macro news for the week of April 4-8 (3:21), Jeff Mayberry and Samuel Lau for their Topic of the Week compare the relative performance of active asset managers in U.S. stock and bond markets (20:01). This discussion starts with the S&P Indices vs. Active report (SPIVA), which compares the performance of active managers to indices such as the S&P 500 in the case of large-cap equity managers and the Bloomberg Global Bond Aggregate for fixed income managers. SPIVA consistently shows that only a small percentage of large-cap equity managers manage to beat the S&P 500 whereas half or more of active fixed income managers, depending on the timeframes measured, succeed in outperforming the Global Agg. However, that’s not the whole story. Jeff Mayberry explains (28:19) bond managers have much more opportunity to select whole bond sectors outside the Global Agg to improve performance, an option closed open to managers who wish or must stay within the large-cap category.

During the podcast hosts’ review of the market week, Samuel notes (5:33) “pronounced moves” at the longer end of the U.S. Treasury curve restored it to a normal upward slope (longer tenors yielding more than shorter tenors), cutting the yield inversion to three consecutive days. As a recession alert, historically inversions have persisted at least five consecutive days. So perhaps, Sam says, the economy is in “a crisis-averted situation.” Turning to the Federal Reserve (12:12), Jeff expressed surprise that Fed officials want to ramp up to the maximum monthly rate of balance sheet reduction – $35 billion for Agency mortgage-backed securities, $60 billion for Treasuries – in just three months. He suggests the markets might not be able to stomach a sustained balance-sheet normalization at such an aggressive pace.

MMM E60: Active vs. Passive: Equity vs. Fixed Income Active Managers

MMM Episode 60: Active vs. Passive: Equity vs. Fixed Income Active Managers

After covering the market action and macro news for the abbreviated week of April 11-14, host Samuel Lau and guest host Eric Dhall, a trader and quantitative analyst on DoubleLine Capital’s Cross Asset team, survey (20:08) the hottest rise in consumer and producer prices since the early 1980s. While wishing Federal Reserve Chairman Jerome Powell success in achieving a “soft landing” that tames inflation while avoiding recession, they criticize (29:52) as hubris claims by Fed officials that they will succeed in achieving “neutral rates” through a rapid series of hikes of the Federal Funds rate. In passing, Eric takes note (25:54) statements by Taiwan Semiconductor that it expects manufacturers to try to build up stockpiles of computer chips to hedge against higher chip prices in the future. This is an example, he says, of how deeply inflation concerns have infiltrated the thinking of business management. 

Given the sustained surge in commodity prices, Monday Morning Minutes listeners who want further background on commodity futures can check out Monday Morning Minutes episode 48, recorded Jan. 14, 2022. That backgrounder starts 15 minutes 46 seconds into the episode.

Among items to look out for the week of April 18 (34:18), Sam and Eric point to the releases of the Fed’s Beige book on Wednesday and latest print of the Leading Economic Indicators on Thursday. In addition, Powell and Christine Lagarde, president of the European Central Bank, Thursday will speak on a panel on the global economy. This episode of Monday Morning Minutes was recorded April 14, 2022.

MMM Episode 61: Rising Prices, Inflation Mindsets and Fed Hubris

After covering the week of April 18-22 for U.S equities, fixed income and commodities (2:06), hosts Jeff Mayberry and Samuel Lau put the 9.4% year-to-date negative return of the Bloomberg US Aggregate Bond Index into historical context (6:41). So far, the ongoing drawdown that began August 2020 is the second-worst peak-to-trough decline in the history of the Agg. The worst, recorded back when the then-Lehman Brothers US Aggregate Bond Index was calculated monthly, was a decline of 12.7% from a peak at the end of July 1979 to a trough at the end of February 1980. After that perspective from the rear-view mirror as well as a review of the week’s macro news (11:08), Jeff and Sam put on their forward-looking glasses for insight into future movements and levels of the Federal Funds rate (17:08). Among their recommendations, they agree with Federal Reserve Chairman Jerome Powell that the monthly dot plot, which depicts simple polling of Federal Open Market Committee (FOMC) members on the future level of the Federal Funds rate, provides little useful information. For better guidance, Jeff and Sam rely on the formal statements of the FOMC itself, the Fed chairman’s news conferences and inter-meeting statements by Fed officials. For market indicators of expected rate moves at future FOMC meetings, they rely on the Bloomberg WIRP function and the Chicago Mercantile Exchange’s Fed Watch page. Both these tools distill rate level probabilities from pricing in the Fed Funds futures market. For an idea of where the Fed Funds rate will ultimately end up, they, like DoubleLine CEO Jeffrey Gundlach, use the yield on the two-year Treasury note.

MMM Episode 62: A Red Week for Markets, Predictive Gauges for Fed Funds

After reviewing month and year-to-date market returns (1:58) and the April 25-29 week’s macro news (10:25), Jeff Mayberry and Samuel Lau turn to the broad topic of commodities (15:06), including asset class’s diversification benefits relative to stocks and bonds, the cyclical factors that have supported surging prices and the structural supply and demand factors that could support commodity prices over the longer term, particularly signatories of the Paris Agreement to convert to green energy sources. “When we talk about renewable energy, you have things like solar, wind and electric vehicles, all of which are commodity intensive,” especially in terms of industrial metals, notes Sam Lau. 
The big macroeconomic news of the week was the 1.4% month-over-month decline in U.S. gross domestic product versus the consensus expectation of a 1.0% increase. “The market didn’t seem to move much on that number even though it was a big disappointment,” Jeff Mayberry observes. The week of May 2-6 (35:14) could be a volatile one, he notes, given a heavy news schedule with, among other items, the ISM manufacturing number for April due Monday, JOLTS job openings on Tuesday and most importantly the meeting of the Federal Open Market Committee.

MMM Episode 63: Where Are We in the Commodities Cycle?

After reviewing Willy Whipsaw’s deviltry in the markets of May 2-6 (1:34) and the week’s macro news (10:16), Jeff Mayberry and Samuel Lau dive (14:03) into the May 4 meeting of the Federal Open Market Committee, which raised the range of Federal Funds rate by 50 basis points, and Federal Reserve Chairman Jerome Powell’s news conference. While the risk markets rallied that Wednesday on Powell’s ruling out for the time being 75 bps move hikes, Jeff and Sam in particular focus on the Fed’s guidance on the pace and timing quantitative tightening. QT is scheduled to start June 1 with potential reductions of $30 billion in Treasuries and $17½ billion in Agency MBS, shedding those assets at a pace of up to $60 billion and $35 billion, respectively, in subsequent months. 

Looking ahead the week of May 9-13 (31:40), Jeff and Sam will be watching Wednesday for the Consumer Price Index for April, and Thursday for the Producer Price Index.

MMM Episode 64: A Wild Whipsaw and a Tightening Fed Star the Week of May 2-6

After reviewing another wild market week for May 9-13 (2:05) and the April consumer and producer price indexes (8:49), Jeff Mayberry and Samuel Lau examine the bloodbath in the algorithmic stablecoin pair TerraUSD-LUNA (14:15), then ponder the unknowns of other stablecoins, including Tether and USD Coin, (16:30) and the risks to the broader financial system (26:43). Among other issues, they note that while Tether and USD Coin claim to be backed by cash reserves and cash equivalent to ensure their parity to the U.S. dollar, those assets are opaque to investors. For the week of May 16-20, (33:10) Jeff and Sam will be on watch Tuesday for retail sales and Thursday for the monthly release of the Leading Economic Indicators.

MMM Episode 65: TerraUSD-LUNA Meltdown and Its Broader Implications

With Samuel Lau on the road, DoubleLine’s Jeff Mayberry is joined on the latest episode of Monday Morning Minutes by Eric Dhall, a trader and quantitative analyst on the firm’s Cross Asset team, to break down a volatile May 16-20 week in the markets. Jeff and Eric begin with a look at the S&P 500, which narrowly averted a bear market Friday and was down 3% on the week. Energy, healthcare and utilities were the week’s only positive performers. Consumer discretionary was the big loser, down almost 8% on the week and 31% on the year. Bonds actually helped this week for those with a diversified portfolio, with Eric pointing out the value of diversification amid a bear scenario. (3:35) Over in Macro Land, Eric digs into a retail sales report that generated positive headlines but could be heralding price hikes at some big retail chains. (7:29) The labor market remained strong, posing a challenge to inflation-fighting efforts by the Fed, whose messaging is saluted by Jeff and Eric for being consistent. (10:28) The Topic of the Week will return next week, when Sam rejoins Jeff to take a look at the FOMC’s May meeting minutes.

MMM Episode 66: A Narrow Bear Escape, Diversity in Face of Inflation and Consistent Fed Speak

Surveying the week of May 23-27, Jeff Mayberry and Samuel Lau (2:01) take note of improved investor sentiment in the form of a rally in stocks, allowing the S&P 500 to skirt the -20.00% definition of a bear market. The improvement in stocks was accompanied by lower bond yields. While bitcoin has typically behaved as a risk asset, the cryptocurrency was down about 1% on the week as of mid-Friday May 27 (8:38). Jeff Mayberry asks whether that move in bitcoin is contradicting the more optimistic message of the week’s rally in stocks, or whether bitcoin’s decline, muted compared to larger losses for other cryptocurrencies, suggests technical selling pressures are abating for the marquee cryptocurrency. 
 
Turning to the week’s macro news, the cohosts zero in on the release of minutes of May 4 meeting the Federal Open Market Committee (FOMC) (10:34). The minutes took note of tightening financial conditions, Fed expectations of a rebound in GDP in the second quarter of the year and PCE price inflation on a path to near the Fed’s 2% inflation target in 2024. “They are being a little optimistic,” Samuel Lau says, “relative to what the market’s thinking in terms of the progression of PCE price inflation.” While the minutes couched the statement in what Jeff Mayberry describes as a “squishy” turn of rhetoric, the FOMC for the first time raised the possibility of the Fed’s selling Agency mortgage-backed securities. 
 
For the week of May 30-June 3 (25:28), the hosts point to the March reading of S&P CoreLogic Case-Shiller 20-City Composite City Home Price Index on Monday; the beginning of quantitative tightening, the ISM manufacturing survey for May and JOLTS job opens report on Wednesday; and the ISM services and May labor market reports on Friday.

MMM Episode 49: A Red Sea of U.S. Equities, BCOM vs. Bitcoin and How to Roll With Trading Volatility

Monday Morning Minutes

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