The Fed set out on its “Openness” Journey in 1999 with the ascension of Roger Ferguson to Vice-Chair. Greenspan’s persona of global central banker to the stars and “man who saved the world” over shadowed the great work and good intentions of Ferguson. After decades in seclusion (and popular books like Secrets of the Temple), Ferguson was charged with opening and clarifying Fed communication and transparency. After Sept 11, he compiled what is essentially the Central Bankers Handbook – The International Journal on Central Banking. Although several “appendix” have been added in the post-crisis era, many Bernanke detractors would have been better served if they read instruction guide earlier.
My objections to the Ferguson Agenda have been well documented in this space. I believe openness reduces policy efficacy. Ironically, a St Louis Fed white paper of the mid-90s leaned against openness also. The paper concluded that policy levied in “surprise” fashion and of greater degree than market pricing was the most effective at achieving desired economic outcomes. The summary was “Do more and do it when they don’t expect it.”
Back in my day, when dinosaurs roamed and trading was conducted by hand signals in pits, certain wise men were given the task of tea leaf reading Fed activity. They were called Fed Watchers. Oddly, as the Fed has increasingly educated any and all who are willing to listen as to there views and operational actions, a cottage industry of re-explaining has boomed. Yesterday’s statement and presser – THEY EVEN DO PRESS CONFERENCES ! – lit up the industry once again. The gist of what I’ve read goes something like this – with decoder ring : 1) “The statement was “clumsy”- meaning? The statement did not read as I would have written it.
2) “Patient is 2 meetings but Considerable Time is 6 months” meaning? I’m making things up that jive with the readily available prices in STIR strips.
3) It was “Hawkish/Dovish” meaning? Insert adjective that aligns with my/firms position in equity/FI/commodities. OR, allows me to continue ranting about the Fed.
Here’s what I think – She meant what she said. Stop worrying about the Fed. Keep watching the term structure between 1 and 5 years, it’ll tell you everything its telling the Fed. The long end was clearly trying to “Go it alone” and that rarely works out.
Happy Holidays from Joe, Hooper and me.
As the Ex-Post “Splain-a-thon” on falling oil prices goes full bubble, I thought I’d throw my 2 cents of kerosene on the bonfire of the positions. I’ll do a quick rehash of some of our prior themes: Too much everything, yada yada, quantitative easing elasticizes economic relationships, yada, stocks vs flows.
The desire to link market price movements to economic general theory remains strong in most analysis. I find it odd since the vast majority of participants worship at the House of Charts. For the most part, you can copy and paste “Product X” on the chart and skip the heavy macro lifting. In a quantitative world, things move abruptly and extremely. Markets are driven by liquidation and failed belief systems.
The consistent, rolling belief system of the Quantitative Regime World has been the idea of impending inflation. Equity, debt, energy, fiat and “stuff” have all been periodically paraded in front of the masses as the next indication, or victim of the CB folly into QE. One by one, they have been systematically taken to the basement bowling alley and clubbed to death (confused readers please watch There Will Be Blood).
As Ray Dalio pointed out today at the Dealb%k Confab, he remains focused on the machinery of the financial transmission system. Although still constructive, he sees the efficacy of monetary monkey business waning. (Where have I heard that?) When the next stimulus demand is made by Mr. Market, a fiscal hand will be needed to make an economic clap. The Debt Truthers will most likely go ballistic.
Chatting with Mark Dow today, we found it odd that Fed watchers still focused on the timing of alleged FF hikes and statement phrase tweaking but not the possibility of balance sheet re-investment abatement (“shadow tapering”?) Until then, I remain happily aligned with the agnostics.
Here’s a chart of
EDM16. Notice- after a protracted period of sideways movement punctuated with position building declines – insert silly Fed reason here – A huge “crash up” took place on Oct 15. (We may have posted some earlier stuff on that ) Then, more recently, the “In Crowd” seems to have rebooted with a long bias around the old prevailing highs..Lets call this November. Now, starting with another reach Wed. morning and continuing into a black hole repricing down after today’s data….someone has been caught on the wrong side of the street…again.
Just to be clear, these are the rates that all the FG and statements and pressers are supposed to keep steady so participant’s don’t get faces ripped off and cause embarrassing global financial problems. Nice work, boys. Several times today I heard the meme that this movement was/would be a “Good thing.” My sense is a large portion of the community, driven out, reversed and clobbered again, doesn’t agree.
I grew up in Western Pa. and went to college in eastern Ohio. Since most of the 60’s took place in the 70’s the Kent State shootings were a huge event. A month after the shootings Neil Young wrote and Crosby, Stills Nash and Young released “Ohio.” The lyric spoke to the times: “Tin soldiers and Nixon coming, We’re finally on our own. This Summer I heard the drumming, Four dead in Ohio.”
One afternoon, riding in a car, a very progressive friend of mine began to sing along with the tune on the radio. We all had a good laugh when he sang the chorus as, “Four Daddy ho hi ho.” I was reminded of this while watching the “protests” in the streets of New York and Chicago last night. They are saying the words but they are disconnected from the issues and actual events.
Two years before Kent St., The 1968 Democratic Convention was held in Chicago (another CSNY song) in the wake of Martin Luther King and Robert Kennedy being assassinated. The Yippies clashed with Chicago’s finest in Grant Park and Mayor Daley issued the famous “Shoot to kill” order. The protest chant was “The whole world is watching.” The inflation rate was 4.5% on its way to 11%. The unemployment rate was 4% on its way to 7.7%.
I posted 2 opinions since last weekend signaling my bearishness on FI and Equity. The anger may not be the Viet Nam War, MLK and Bobby but the bull market has not lightened the national mood. This is bear market type stuff. Red and Green Eurodollars are getting smashed. The expected narrative is leaking in: “Its good that rates are/going to move up.” I’ve got news for you, it ain’t. Four Daddy Ho Hi Ho !
Friday, we will get more fuzzy data on the employment situation in the US. There will be a cornocopia of viewpoints and “pick -a -parts” to an average to slightly better print by our guess. I don’t like stocks or bonds either way. We utilize a model to signal when to interact with Mr Market. Basically, I see most FI managers over their “bogey” and manufacturing yield. On the equity side, the QE Death March has ground the non-belivers to dust. I see a significant bearish divergence on SPZ in the basic graphical representations I can interpret. Clip boards are often thrown out the window quickly but my game plan is: Let Hooper tell me when its safe to act on what I already feel – I’m bearish. 2083.75 on the SPZ would light the candle
Note: No connection to economy required.
We are adjusting our outlook heading into Q1 2015. From our original belief that “Things would kinda sorta work out” in 2011 to last year’s “MOTS – More of the Same”; we have occupied rare space for us – optimistic and constructive. We continue to ride the ripples of a post-financial crisis Structural Trap and global capacity glut we’ve labeled “Too much everything..” My best call of 2014 was against the well hyped views that 1) “oil was a buy above $100 “because the economy was growing” AND 2) “The falling price of oil is ‘bad'”. Never underestimate the idiocy of weak economic thinking mixed with a graphic of yesterday’s price action.
I was very wrong on market rates rising. The shape of the curve – flatter – bailed out the poor call on an execution basis. Being “right” for the “wrong reasons” is the last bastion of a scoundrel, however. The 5 year is on the high side of a boring 3 point range for the year ! The 10 year is $6500.00 dollars better for a contract. The long end is considerably higher in price. Last Summer, we recognized that owning bonds for any and all reasons was/would be part and parcel of the protracted period that marks a secular apex. Spurned at 15% in 1984 as “certificates of Confiscation” and adored today.
We believe BOTH equity (especially tech) and F.I. are headed for rough weather. The adjustment will come in 2 phases. The first will be the exciting market declines. The precarious situation in Europe, and the annual calls for Chinese collapse, egged on by a ratings starved media, will produce some sketchy sessions. The second, and much more difficult phase, will be the realization that outside of San Francisco real estate and some Wall St. IB activity …it won’t matter. The importance of “the Millenials” will be swapped for the demographic tidal wave of the retiring Boomers. A plethora of participants that criticized the Fed’s actions as ineffective will, like Vladimir and Estragon, yammer away waiting for Janet Godot.
A Liquid – has a definite volume but no fixed shape.
The World got even more liquid over night. The PBOC joined the ranks of global CBs and governments embracing the fallacy of a Liquidity Trap. Grey-hairs love to oscillate between inflationary fears and “pushing on a string”. We continue to believe it is the system infrastructure that is damaged not the “volume” of its liquidity.( see Ad Nausea earlier postings) Whether the Fed’s balance sheet, the ECBs threats or the PBOC pump, the “shape” of the liquidity is not calibrated correctly.
The Modern Monetarists continue to advocate the view that if you aren’t getting the desired results, you simply need to do MORE. The truth is the Globe wasn’t running at stall-ish speed because it lacked liquidity. Now, there’s more of it. Perhaps, when this proves feeble too, we’ll start working at changing the structure of the “vessel” rather than the quantity in it.
Another day…another weak story on the Treasury “Crash Up” of Oct. The promulgated meme is that “There was record volume so everything is fine.” This is an argument only the head of the CME Group could love, oh wait , HE’s THE ONE THAT MADE IT !
That the Ultra Bond went up 9 points on roughly 165 contracts is never mentioned. Abnormally large volume after the crash up is to be expected. The real question is: Why do exchange officials and regulators persist in selling this false narrative? IF, they truly believe this falsehood, we are in bigger trouble than thought because the leaders and officials of the industry are ignorant.
Everything is NOT ok in the trading of US Treasury securities and futures. The reasons are a mulligatawny of LSAP, regulatory change, electronic platforms and ZIRP. Rates fell in the Oct seizure but the next disruption could be in the other direction. We got a glimpse of the carnage that could cause in the Taper Tantrum. In the meantime, people will keep telling you there’s nothing to see, move along, everything is fine. It reminds me of the Mayor in Jaws: They’re not going to look inside and have the little Kitner boy spill all over the dock.