Now what ?

In November of 2008 Quantitative Easing became a household word and the LSAP (Large Scale asset Purchase ) program was launched. Quickly, the 2 concepts became viewed as one. Like Ebeneezer’s nighttime guests, QE 2 and QE 3 were visited upon us in Nov. 2010 and Sep. 2012. Unlike Scrooge, the nation has not risen with a renewed outlook and joyful re-incarnation. The landscape has changed markedly, however.

The simple truth is markets care about the calibration of monetary policy not the ugly way in which its delivered. Now that LSAP has faded away, we will get another chance to see how far, if any, the spigot has been left open. Taylor, and many others, has argued that the FF rate should be considerably higher. Here’s a thought experiment: When oil prices move, a multitude of global adjustments take place. Yet, when the most fundamental borrowing rate in the financial system is “artificially held too low” for years….nothing happens and more importantly, Mr. Market makes no attempt to alter it. Oil traders are brilliant but bankers are all dumb.  We do not,,,and have never believed it.

The purest example of our belief is what transpired earlier this month. After months of FG prodding that the Ghosts had all visited us, participants herded into the promoted idea of “raising the rate.” 10 sessions ago, just before the POMO swansong, that idea blew up magnificently. QE continues to have the dubious reputation of being completely ineffective AND the cause of everything. We have tried over the past years to draw the distinction between LSAP (and other innovative programs) and the policy regime..QE. We remain in a QE regime so prepare for reports on halting of re-investment and the roll down of the Fed balance sheet. Raising rates is reactionary Fed policy not precautionary. Goodbye POMO, hello ???

Classical Monday

 30 minute atr
 daily pivots
 weekly pivots
 upside retracements
 downside retracements
 regression channels
price support and resistance
On the economic calendar:-
09:45 PMI Services Flash (Consensus 58.0 v Prior 58.5)
10:00 Pending Home Sales (Consensus 0.8% v Prior -1.0%)
10:30 Dallas Fed Manufacturing Survey (Consensus 7.5 v Prior 10.8)
11:00 4 Week Bill Announcement
11:30 3 Month Bill Auction
          6 Month Bill Auction
10:15 – 11:00 Outright Treasury Coupon Purchases between $0.85 – $1.05 billion

The 12 Monkeys Rule

If you really did know the future, everyone would think you were crazy anyway.


Yesterday, 2 unrelated “happenings” came to light in FI Markets. First, the silly. After a well intentioned long period of warning, the CME Group altered the delivery basket for the Classic to account for the 5 year window from 2001 to 2006 for which no standard issue existed. Months of meetings and discussions failed to soften the 10 point higher repricing of the illiquid contract for next June. A paltry 1600 contracts traded and the slaughtered will, as usual, fade into obscurity. Unlike the “leaked” stopping of issuance announcement, where well known players bought wildly before the release, this move seems to have little to cheer.


Harley Bassman (super bright mortgage analyst) emerged from the shadows at PIMCO to pen a typical “Must Read” on the Eurodollar term structure (I know a guy that writes about that a lot, I heard he was awesome) and implied vol for those slopes. I won’t attempt to paraphrase Mr. Bassman’s great writing in my irreverent and pedestrian way, just read it here:   

However, between the lines rests a very direct push back to the huge position that Bill Gross was holding. Essentially, BG was long the strip and short the volatility. As the color coded lines show, BG was betting that a steady state of roll down would increase the price AND converge the green vol to the much lower red. Bassman argues that a long position should also be LONG the red vol.

Discussing this oddity with GRD ( @Groditi on Twitter ), we noted that without a robust MOVE future, yet, Hedgies and Specs caught out in the FI squeeze and stock market air pocket down had no alternative than to buy VIX during the event. The present pricing indicates this insurance was also no bueno. The apparent disconnect between the strip and the implied vol also shows the decimation of FI trading desks has allowed situations that would have been “arb-ed” away much earlier to fester and morph into anomalies, correcting violently sans liquidity… indicated in event 1 above.

Take heart, if you did know the future, no one would believe you anyway.