Tuesday, October 12, 2010

I'll never let you go, Ben

TMM was surprised to see that the renowned dove, Jenet Yellen, in her first speech as Fed Vice Chairperson chose to warn about the dangers of policy being too loose. As we noted last week, the QE2 mania has permeated many asset classes with anything from 350 Gigadollars to 1 Teradollar or even more. The question is, with these numbers flying around whether it is possible for there to be an upside surprise in terms of QE announced? TMM note that historically, the Fed have argued that they do not wish to be seen as monitizing the Federal debt, and as such, a ceiling at the level of net issuance is appropriate. Given that hard limit, TMM is beginning to wonder if QE2 the appropriate name. It certainly seems as if the trade is so crowded that the lifeboats have had to be ditched to make room. And that, all of a sudden, makes it look more like the Titantic...

...has an iceberg been spotted?

As has often been the case in the "macro is everything" world post-2008, correlation has been comically tight amongst thematic trades. Look no further than Fortescue, an Australian iron ore producer for an AUD proxy. Long term pricing for iron ore by most analysts worth their salt is 50% down from here which makes this all the more remarkable: if this company hits its numbers then iron ore demand has to go up a lot at at time when China is planning on reorienting its growth path to less fixed asset investment.

Similarly, those in the know aren't arguing about whether AUD is fair value but more just how many sigmas worth of deviation we are looking at here. TMM estimates range from 1.7 to 3. Hardly a great long term buy unless you really think the USD is going down the toilet, in which case there are better things to buy.

It is TMM's view that once again, people's risk models may not be picking up just how much risk they have on and how correlated their books may have become. Which means that those riding the QE2 might want to look at alternative transport or at least know where the lifeboats are.


abee crombie said...

is yellen's speech really hawkish? here is what she said in the speech titled "Macroprudential Supervision and Monetary Policy in the Post-crisis World"

Second, recent research has identified possible linkages between monetary policy and leverage among financial intermediaries. It is conceivable that accommodative monetary policy could provide tinder for a buildup of leverage and excessive risk-taking in the financial system.

i thought what fischer and bullard recently said were a tad more hawkish... but MM does bring up a good point, cheers

Leftback said...

Does anyone think they would risk giving a real number in the minutes? Not likely... that would spoil the game and reveal what mystery meat was in the pre-election hamburgers being served up by the Obamanauts*. Most likely they will talk about "risks to the downside" and "additional stimulatory measures".

* I am not a Republican. Equal Opportunity Cynic.

karen said...

Fantastic post.. exactly on the price appreciation of the aussie.. and similarly on some US treasuries.. exactly how much more water can be squeezed from those rocks?

sharpe_mind said...

so if the USD really is going down the toilet, what's the better thing to buy?

Nemo Incognito said...

Sharpe mind - $Asia. Just look how long mantega's line in the sand lasted. That and platinum. Would shorten duration on the $Asia exposure though.

Nic said...

If the Fed wants higher inflation why does it continue to buy treasuries to keep US yields down.
I'm having a blonde day.

scharfy said...

The monetary policy that the US is pursuing feels really really dangerous.

What would constitute all-in move by the FED?

Could they put in 6-8 Trillion of QE over the next 5 years and monetize the 1/2 fiscal deficit? Could they buy stocks? Will they swallow every mortgage in existence?

In the Brave New World here to stay?

Again, this feels dangerous.

Leftback said...

Nic, the FED wants to drive others OUT of Treasuries into risk assets including commodities such as crude, thereby priming the pump for inflation.

's easy, innit, this macro?

CV said...

This is beautiful, truly beautiful. Teflon market if there ever was one. Really, if Bernanke is worth his socks here (i.e. if he stays true to his code) he will seize this opportunity and EXCEED the current market expectation of QE2 thus giving the final blow to setting up a new credit cycle.

Really, why make it so difficult. Forget an inflation target, just set a target for the SP500 (I am thinking 1400-1500) and then order the Fed desk to buy up SP futures.

Oh and LB is definitely right on Treasuries here.

Note: I am staring in absolute disbelief too; I am net short and feeling the pain! BUT I may soon just give up and climb on to Bernanke's shoulders ... very difficult to be a contrarian when you are playing against the Fed printing press.


karen said...

I am following along here, but not sure where I am going!!! LOL.. with you Claus, especially.