Guiders 1 - Bond Vigilantes 0 - Guidance minus 1.

Wednesday, September 18, 2013

We would like to think that our last post was the reason  the FED held back on tapering, having taunted the CB'ers with our "You can't pull it off, you don't have the respect of the market for your commitment in the face of anything" taunt. But we doubt that very, very, very much.

TMM's polite "front of house" way of reporting the event is -

The FOMC is now on the record that they are unhappy with 10y yields at these levels given the current backdrop, at least for now and that a 7% UER rate no longer means no more QE. These dovish shifts were surprising because the data appears to have come in inline with the Fed’s own projections, and Bernanke said so. The Fed seems most worried about the rise in mortgage rates and potentially the fiscal issues ahead, and it appears they want to take out some insurance against that. It’s not clear exactly what will ease their concerns, so until the Fed signals otherwise, yields may be range bound.

Positioning suggests that the rates move could move further. But we note that relative to the FOMC’s own projections, the front end now looks fully priced. The median FF projections for YE 2015 and 2016 are 1% and 2%, respectively. EDZ5 and EDZ6 are trading at ~1.3% and ~2.4%. Adjusting for the historical 15bp spread between 3m Libor and Fed Funds, that leaves a risk premium of 15bps and 25bps, respectively in those contracts.

And the impolite behind the scenes TMM response is - WTF?

This has lifted the phrase "Don't fight the FED" to a completely over the top "Don't f**k with me you m*fkr" response. But there is a paradox here. If forward guidance is meant to be taken seriously then how come the derivative of forward guidance, namely forward guidance of forward guidance can be so totally and utterly shot down in flames. How can you, Mr B., expect us to believe we will end up where you guide us if you let us go so far off the path of expectation in the case of QE. You had the chance in August and early September to guide expectations of QE but no. You watched us all the way to the cliff edge and then nudged us over. A backlash against the assumption of the Hilsenrath leakage days?

So well done Mr Moderation. You may well just be trying to say "3% is too much in UST10y" but you are going to have to pull off some particularly wordy magic in your statement to abate the headlong spew in markets back into everything that has drifted off since May's first mention of tapering.

TMM are prepared for carnage, or rather Bernankage (that's going in the glossary together with Carneyage) as the world lights celebratory cigarettes in the global credit crisis room that has just had another 300psi of gasoline vapour pumped in, by buying the ying-yang out of yen, buying the cahoonies out of carry, buying the 'eck out of equities and the 'emming hell out of EM. And as for Gold - We can hear the roars of "toldjasos" echoing from the cabins in the woods. Staunch that, Florence Nightingale.

Ben's parting gift to central bank history is to go down as the FED chair that made Greenspan look not so much a hawk, but more a velociraptor.

Fed guidance -

Posted by Polemic at 9:31 PM  


Back with a bang. Great post.

Hotairmail said...
10:21 PM  

hotair ,,when are you going to give me permission to see your blog?

Polemic said...
10:41 PM  

How do you know I have a blog?

Hotairmail said...
11:42 PM  

Anyone suspicious this plays out exactly like last September? Market took until XMas to truly rally after selling the news.

Anonymous said...
2:41 AM  

C Says
For a start I think the problem is this was not expected 'news' it was a definite surprise and that is different. Second the moneyflow indicates that money ran to the sidelines in the last couple of months waiting so there is fuel to burn by people who will be benchmarking.

For clarity I am firmly in the camp the future is unknown. Opinions ,or "suspicions" are just that and may turn out right or wrong,but don't disprove the simple issue that we collectively are shit are crystal ball reading.

Anonymous said...
10:15 AM  

Pol with the NSA IP-reading skills? ;)

Anyway, very good day for Detapering Partners yesterday after a looooooong and painful bleeding summer.

We thought they would taper but bonds would rally, as event priced in (or at least that's the way we rationalized the red July/August on our screens), so obviously no taper felt a bit like Christmas.

The reaction function of housing figures to this bout of (market) tightening scared them off, and we shall say, understandably so.


Equity and carry monkeys gonna chase...

... and call us crazy, but we are going to start harvesting vol here, because as much as we like our early Kevlar fixed income picks to come back to life, what this does in our view is creating a more violent reaction to when the Fed actually takes the foot off down the road.


Anonymous said...
10:46 AM  

"when the fed Actually takes the foot off.,," Dunno with ff futs saying 2016 and bernanke talking about 2018 yesterday I think it's way to soon to even really think about the fed being anything but a sell-side table pounder.

Anonymous said...
11:47 AM  


I understand--we're bad at crystal ball reading.

That said I remember distinctly the sentiment last September and it was very similar.

A lot of 'the market just can't trade down again' talk.

"Money on the sidelines" waiting to get in can be mistaken for sheep jumping off a bridge, no?

Anonymous said...
4:21 PM  

C Says
The thing I try to avoid are market catechisms such as "sheep" and other similar stuff. Usually I find them coming out when people ,me included, don't have much to hang our conviction on.

Regardless of the above all I can say is there was widespread survey info telling us that many people chose to increase their cash positions in the months running into this period. Against that equity held firm in the broadest sense. Hence, I repeat there is sufficient fuel still out there. Whether or not it opts to get back in I cannot say ,but the potential remains for that to happen.

Anonymous said...
5:23 PM  

Understood and not trying to start something but there was just as much cash on the sidelines pre-Fed last September as well. Managers have been "under invested" for quite some time. Seems awfully convenient for Mr. Market to take pity on them now of all times.

Anonymous said...
5:58 PM  

Bb was worried about the leveraged trades in June. ( em and mbs specifically, imo) he speaks and they get crushed. but then so did the 30yr which is the all important # for conventional housing. (Why not 5 year resets like in Canada) it starts to worry him so bb backs off in order to save the marginal homebuyer. But he's only adding fuel to an over extended stock market, which is probably gonna march straight up from here. China and Japan were dumping tsy s in the pre period. Not sure they are gonna jump back so quick. I honestly think he is diggng a deeper hole. But that's yellens problem now. Can we not get a bigger bounce in mReits?

abee crombie said...
1:19 AM  

"when the fed Actually takes the foot off.,," Dunno with ff futs saying 2016 and bernanke talking about 2018 yesterday I think it's way to soon to even really think about the fed being anything but a sell-side table pounder.
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5:24 PM  

Detapering partners shaking their damn head.
That is all.
Good weekend.

Anonymous said...
8:11 PM  

On the US still... This guy does seem to make some strong points on inflation and corporate profits.

Profits growth has been driven mainly by the federal budget deficit after 2008 with profit advance beginning to correlate with the lagging net investments much more loosely, and now it looks as though the deficit might actually start shrinking. The only thing that will try to keep profits from falling (as deficit increase becomes absent) is the declining consumer savings level. But I would suspect it will be only a very small road bump to halt profit decline compared to the deficit effects.

Also on inflation, the CPI doesn't show the housing price data but rather "owner equivalent rent". Housing price has been frontrunning the OER by a wide margin, which doesn't show in the headline inflation. Rents otoh have been sluggish.

When rents and housing start diverging by such a manner, shouldn't that be a point of worry, as rents are by far a better indicator of the economies health? The investing thesis for housing is shrinking, if we believe that the asset price must somehow be tied to the yearly rental income. Equivalent as in stocks (earnings yield).

Finally the situation in equities:

So maybe the next big imminent question will be, is the corporate profit decline and its effect on SP equities going to spill over to the "rest of the world"? Or will we just start seeing US vs "ROW" diverging.

Anonymous said...
5:12 PM  

Another interesting thing noticed...

Is the current sized QE running out of juice? The reactions on the initial "status quo" day seemed positive on SP, EM's and REITs (no surprise there given the huge counter-expectations), but more importantly the few subsequent days showed complete lack of enthusiasm.

QE wow-factor in need of an upgrade.

Anonymous said...
5:52 PM  

Thanks for posting this article. I'm just interested in specific knowledge here and there, not really a degree, on topics that interest me.

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usa proxy said...
2:02 PM  

Was Ben our chief of Theory?

After watching Ben last week give traders a good old fashion Chinese burn of the synapses, one question burns within me , did he bring back in time from the future the " Cosmopolis " traders of 2050 during his yennish term as Fed chief?
We've witnessed during his term an abundance of so called weight for age campaigners in the hedge fund club class drop out of the industry with some claiming the fundamentals don't align with the price action being a significant cause for the lack of alpha.
It kind of reminds me of the debate ( still going ) about which is suitable for rating horses, weights or times..the general view was that when the yanks came out to Australia with their stopwatches they found out the hard way, (is there any other?) that the grass tracks didn't seem to be conducive the USA technique of time based ratings which are applied to Americas dirt tracks.
So this had me thinking , every country has been affected by the Yennish Put and we've seen more than a few scramble to the decks once there currency broke through a " equilibrium trade threshold " but nonetheless the USA technique has been bullish for global stockmarkets.
The one question I have is when Ben decided to turn dovish at the last meet , did he also give a no confidence in his stopwatch?...we know he may want to pass a neutral baton to Yellen at the end of Year..though when she steps in to take control what type of traders is she going to face after Ben sublimely conditioned the market with a BTFD mentality....yep, you guessed it...last week was a prime setup if you ever saw one!
But I put this to you Ben, how long can you keep clocking on grass tracks?
ps..when do I start?

amplitudeinthehouse said...
2:54 PM  

This article is mind blowing. When I read this article, I enjoyed.

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Shannon Baker said...
7:40 PM  

Great post, but I actually like the idea that the Fed has dimmed the lights in the bedroom and now we have to fumble around in the dark.

Forward guidance with hard edges is fine if you are managing hedging programs or need to implement longer term investment strategies, but if you are more tactically oriented and seek disequalibria then this turn of events is a good thing. my 2c -and it's worth no more than that...

Essan Soobratty said...
10:02 PM  

market looks FUGLY. October lows, just like last year, followed by 1800 by the New Year.

Anonymous said...
12:49 AM  

C Says
I like to let a few days g by after and event such as last week.
I am not "suspicious" about the data which now shows record high moneyflow into equity ETF's which comes hard on the back of record outflows from govt bonds.
I might be wrong ,but I as an enthusiast of Mean Reversion I personally would not ignore that sort of extreme of readings. I am always "suspicious" of "records".

Anonymous said...
12:50 PM  

Haven't made a trade in ten days. Choppy action on rubbish volume.

It's Panto Season again, with The Cliff being replaced this year by The Ceiling...... hit it, Lionel:

Dancing on the (Debt) Ceiling

(Caution, there are some really bad haircuts in this video...)

Leftback said...
1:35 PM  

Absolutely uncanny how we're following the same script as last year's September post-Fed, when optimism was high and managers were still "under invested" and looking to piggyback the BB put.

Anonymous said...
3:06 PM  

Quite so. We are expecting a dribble downwards while the Fools On The Hill continue their kabuki theatre, then a relief rally that begins from the moment of maximal apparent congressional ineptitude.

Things are looking a lot better at Low Rate World asset management after we have had a couple of weeks for the Detapering Partners trading thesis to sink in. Like many others here, we were positioned for a modest rally in bonds and REITs post-taper, so the Non Taper was a gift, really.

We think that US equity markets are now discounting some seriously lousy fixed income trading results soon to be revealed by the big boys, and that those earnings disappointments will probably coincide with the worst excesses of the Washington Clown Show. October's options expiration occurs at a convenient time of the month, and should a DC debt fudge emerge next week, it will enable Vol Sellers to engage in another ritual slaughter of the shorts.......

All in all, it's a great time to be watching, while receiving rates and dividends.

Leftback said...
5:12 PM  

Senate passes bill to avert shutdown.

But of course it's the House where the real loonies are. So today's vote doesn't mean much.

Leftback said...
7:29 PM  

It's a slow news day, so LB thought he would highlight a couple of stories on the bear side:

1) Spreads have been widening, JNK weakening:

Junk Bonds Weak

2) Increasing whispers out there of another imminent downgrade of Italy by S&P. Can't find a respectable outlet with this story yet but Ambrose will be all over it, you can bet.

Everyone knows Europe doesn't want EUR to stay up here so don't be surprised if it doesn't. Mini-crisis, anyone?

Leftback said...
8:16 PM  

I think they might have a clue there LB. If someone thought all is finally well and stable in Italy, think again. America doesn't have a monopoly for clown shows:

This might well mark a beginning for next seasons EZ soap opera, plunging things to chaos and bond rates upwards in Club Med.

Meanwhile the Mangler will be busy with her own governance so no support expected from that direction.

All speculation for now thou....

Anonymous said...
8:49 PM  

Yes, it is looking distinctly pear-shaped on this Sunday night, after a quiet beautiful weekend here. EURUSD down and Spoos plunging, which according to the media is mainly on Italy news and the possible US government shutdown.

Leftback said...
3:42 AM  

C says,
I was intrigued by this.

"The U.S. Census Bureau says the median American household’s income was 1.3 percent lower in 2012 than in 1989 after adjusting for inflation"

I suspect the UK would be not substantially different.

My very long term is this. Post '70's we have two main drivers of wealth distribution. The first was the New Management Theory ethos which saw Income push upwards radically changing the long term multiples between income groups. The second was the Post Volker central bank approach to monetary policy which in my view rewards holders of capital first and reinforces wealth distribution away from the median.
Note that the transmission effect of such policy appear to have diminished over that period. After each recession the recovery appears slower than the one before.
Note that the % consumption between income groups also differs. The poorer you are the more of your income you tend to consume. The richer you are the less you consume.
As jigsaw puzzles go I get the sense that monetary policy has become the problem and not the solution. By exacerbating trickle up in wealth it is creating an issue with consumption in the sense that our economies after each recession leave a larger and larger segment of our population further behind the median.

The above was camouflaged I suspect twofold. First by Asian growth creating a deflationary effect which was beneficial to the purchasing power of Western incomes. Secondly by the deluge of easy credit which at least supported incomes diminishing purchasing power by allowing greater and greater levels of liability to be attached to future incomes. Not bad ,but if those incomes are on aggregate either going nowhere ,or even diminishing then we have a problem.

I think the obvious conclusion here is we may have reached a tipping point on the benefits that can accrue from easy monetary policy practices as it is. The answer to future sustainable growth as opposed to simple repetitions of bust must lie with fiscal policy correcting the distribution of wealth.
That at first blush probably reads as socialist in nature ,but it isn't. The point I am making here is it appears to me that even the top income groups will start to suffer from diminishing returns on investment if income distribution remains as it is.

Anonymous said...
11:46 AM  

C, great summary of where we are.

LB passed by Cheltenham in one of Sir Richard's tube like trains last week, while on a secret mission to do nothing slowly for five days. Weather was perfect.

US Panto Season has arrived early this year. A twin bill this time, Shutdown followed by Ceiling. Not exactly classics, a bit like listening to Cav and Pag.

Leftback said...
1:20 PM  

Sterling in Wonderland, closing in on $1,6300. Should one prepare to bash Betty, TMM?

Leftback said...
3:09 PM  

Mr. Market reaction to the shutdown is like the age old pondering:

"If a tree falls down in the forest, but no one is around to hear it... does it make a noise?"

Anonymous said...
5:36 PM  

C Says
I thought "Mr Markets reaction" was actually period of the month automatic reinvestment moneyflows offsetting what I still expect to resolve downwards.

Anonymous said...
10:24 AM  

Yes, indeed. Q4 fund flows duly absorbed.

Today's ADP number does rather support LB's tepid US economy ("faux growth") model. Fixed income looking healthy and rate-sensitive assets percolating nicely. We may get a brief burp in the Treasury market if the Fools on The Hill are still dithering when next week's auctions arise, or alternatively if there is a "risk on relief rally" (RORR) and we are hedging against this possibility. If it happens it would surely be a buying opportunity in bonds, based on today's underwhelming jobs data.

Leftback said...
7:36 PM  

The US economy explained in two charts:
Declining real median household income and a declining workforce:

No work, no income, no problem.

Solution: Higher levels of personal current transfers (i.e. SS, Medicare, SSI, DI, SNAP, etc) fueling consumer spending.

Jim said...
8:13 PM  

The US economy explained in two charts:
Declining real median household income and a declining workforce:

No work, no income, no problem.

Solution: Higher levels of personal current transfers (i.e. SS, Medicare, SSI, DI, SNAP, etc) fueling consumer spending.

Jim said...
8:14 PM  

C Says
There's not much out there I want as it stands. When the US get's out of deadlock it is going to get very messy very quickly in some stuff. Thinking Rupees ,Yen etc etc. What that might then do over in metals etc as well emerging mkts in general. What hath been giveth the good lord taketh away.

Anonymous said...
12:55 PM  

In complete agreement with the last two comments. Starting to position for the inevitable dollar rally. We are already short some Euros, bashing Betty, hedging US fixed income exposure and lightening up on EM equities in anticipation of new buying opportunities ahead.

After the inevitable post-Panto monster relief rally, who knows? The US remains weak and playing 1-2% growth outcomes will be the way to go. But the next big thing will undoubtedly be US equity and USD shorts getting fried.

Leftback said...
3:48 PM  

Panto in full swing this afternoon:

LEW: "Look out, Boner, Default is behind you."
BONER: "Oh no it isn't!"
BONER: "OH no it isn't!"

{The Spoos plunge, BIG EARS enters, smirking}

BIG EARS: "Hey, Boner, Default is behind you."
BONER: "Oh no it isn't!"
BONER: "OH no it isn't!"

Repeat until curtain....

Leftback said...
5:10 PM  

C says
I wonder when someone is going to mention the possibility of a treble top DOW. Oh I just have !

Anonymous said...
10:50 PM  

Dollar rally in effect, even as the politicians dither. We will see more of that, and higher US rates, when agreement is reached. Markets are really yawning at the debt ceiling debate and the shutdown, both of which they have seen before (2011 and many times).

Have been short Betty until this morning. Will look to bash her repeatedly on renewed bouts of dollar weakness. Euro also too high here.

Vol sellers are going to have their way in this market sooner or later. After the inevitable equity bounce, we will go back to dancing the Taper Tango....

This is a good time to lighten up on those EM credit and equity trades people have had on. There will be another opportunity before too long, after the USD bounce has run its course.

Leftback said...
3:42 PM  

where's all that sideline money rushing to get in?

Anonymous said...
4:38 PM  

question for the fx crowd

usdjpy make or break here, technically, right?

with fxvol somewhat low (vs equity), best bang for your buck (see what I did there) in US fiscal shenanigans trades?

or are we reading this wrong


Anonymous said...
2:49 PM  

MacroMan is dead. Long live MacroMan.

Anonymous said...
5:39 AM  

Everyone loves EU banks!

Its the new biotech, FB and Tesla

The 'S&P is going to trade within a range for the rest of the year' crowd must be feeling it as 1700 is now within shooting distance.

abee crombie said...
5:01 PM  

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