So here we go again.
Stocks have (probably correctly) looked through ongoing tensions in Ukraine and are within a pitching wedge of the all time highs (well, the SPX at least.) At the same time, fixed income markets are rowing merrily down the stream, with many bellwether Eurodollar contracts also close to the top end of the yearly range.
(BBG chart courtesy of the world's most deluded fantasy soccer player.)
The prices, incidentally, imply rates well below those suggested by the infamous dot scatter plots in the Fed's latest SEP- and indeed most of those before that one.
This week, of course, see the release of both the July Fed minutes and the annual Jackson Hole symposium at the end of the week. The theme for the latter, "Re-Evaluating Labor Market Dynamics" is particularly apt given the speed at which various thresholds have been blown through in the US and UK.
One doesn't exactly need Holmes' power of deduction to presume that at least a portion of the conference will be an apologia for Yellen's relentless cherry-picking of negative facts to support the initial conclusion (or is that mantra?) of "more accommodation is needed." Your author has demonstrated on a couple of occasions that current labour settings are less atypical than Yellen might have you believe.
Of course, Macro Man's opinion and two bucks will get you a cup of coffee and not much else, so one has to remember to focus on what one thinks the Fed will do, rather than what they should do. Even there, however, it is important to recall that next month's Fed looks likely to introduce some clarification on what the monetary policy of the future will look like, and perhaps also offer a few tweaks to the communication strategy.
These will be seen as another successfully surmounted step on the road to tightening. Moreover, with markets currently pricing quite a bit less tightening than the median FOMC participant, the risk looks skewed to the downside from Macro Man's perch. If for some reason this week's cherry-picking at Jackson Hole isn't as effective as expected....well, that could be the catalyst for a nice little downtrade.
Stocks have (probably correctly) looked through ongoing tensions in Ukraine and are within a pitching wedge of the all time highs (well, the SPX at least.) At the same time, fixed income markets are rowing merrily down the stream, with many bellwether Eurodollar contracts also close to the top end of the yearly range.
The prices, incidentally, imply rates well below those suggested by the infamous dot scatter plots in the Fed's latest SEP- and indeed most of those before that one.
This week, of course, see the release of both the July Fed minutes and the annual Jackson Hole symposium at the end of the week. The theme for the latter, "Re-Evaluating Labor Market Dynamics" is particularly apt given the speed at which various thresholds have been blown through in the US and UK.
One doesn't exactly need Holmes' power of deduction to presume that at least a portion of the conference will be an apologia for Yellen's relentless cherry-picking of negative facts to support the initial conclusion (or is that mantra?) of "more accommodation is needed." Your author has demonstrated on a couple of occasions that current labour settings are less atypical than Yellen might have you believe.
Of course, Macro Man's opinion and two bucks will get you a cup of coffee and not much else, so one has to remember to focus on what one thinks the Fed will do, rather than what they should do. Even there, however, it is important to recall that next month's Fed looks likely to introduce some clarification on what the monetary policy of the future will look like, and perhaps also offer a few tweaks to the communication strategy.
These will be seen as another successfully surmounted step on the road to tightening. Moreover, with markets currently pricing quite a bit less tightening than the median FOMC participant, the risk looks skewed to the downside from Macro Man's perch. If for some reason this week's cherry-picking at Jackson Hole isn't as effective as expected....well, that could be the catalyst for a nice little downtrade.
17 comments
Click here for commentscheers MM, one can always dream about the Fed actually saying something hawkish (aside from Lacker and R Fischer)
ReplyUp and at'em says world stock markets. India new highs, SHPROP, well dont tell it that China property prices fell for the 3rd straight month. Nasdaq new highs too.
I'm thinking the catalyst for higher interest rates is actually going to come from ECB. When QE is finally announced, the 'buy rumor' trade in Bunds might be over and as experienced in the US, when QE started rates actually rose.
I thought this post was going to be about Iraq.
ReplyStop worrying, just buy..
ReplyProperty website Rightmove Plc....
"London home prices down 5.9 percent from last month... biggest drop since December 2007"
Bloomberg...
"Australia’s misery index -- the sum of unemployment and inflation rates -- is at 9.0, the highest since 2008"
I refuse to pay two dollars for a cup of coffee :)
The market is dominated with price-insensitive asset allocators. Passive index investors, pensions, companies engaged in buybacks. None of the newsflow will really matter until this class of market participant either runs out of cash or they seek different allocations. Catalysts for that happening are diverse, and not all fed/rate linked. The much-cited $1.6T Japanese pension fund is worth about $100bil of new allocations into US equities alone, if you do the math based on the rumors of new allocations. Thats a lot of market impact, and while they are a big fish there are lots of others out there.
ReplyI believe this is why this market is so tough - the headlines, the geopolitical, the economy, even the underlying earnings, simply do not matter in the face of this wall of assets coming into the US. The trader in us looks at something like Ukraine, and thinks about scenarios that increase risk premiums, and expect a discounting mechanism. Your counterparty just needs to buy another billion in securities, day in, day out.
I'm fascinated at how badly wrong most professional investors/money managers (like many here) are. Your problem guys, is that you are intelligent people in a world of stupidity. Allow me to point out the obvious:
Reply1. Interest rates will NOT rise to any meaningful level in your lifetime.
2. Central banks ARE colluding in their ZIRP & QE programs. This crazy asset inflation will NOT end in your lifetime.
3. Eventually inflation will become entrenched - this is planned. Central Banks WANT TO INFLATE AWAY DEBT.
4. Our current financial system based on the USD as a reserve currency WILL change in the next 20 years.
Mr T and TruthHurts, I dont disagree, but I can also remember thinking the same thing in 2006 & 2007 right near the end of the cycle.
ReplyYes there is a sea of money out there, but like bruce lee said, water can flow, put water in a cup, it becomes the cup. But water can also crash!
Mr T
ReplyI totally agree.
Truthhurts -
I m not a fan of the you/me them/us divide based on profession. I feel its more a case of application of experience and theory. I, on many occasions, would feel that something had a 50/50 chance of going up or down and on the face of it that would be the same probability outcome as flipping the coin that anyone could flip. However I had hundreds of reasons why I didn't know whether it was going up or down whereas the coin had none.
It s a bit like that here. You may some entrenched over-riding big macro beliefs and they have not been dispelled by either price action or policy change ( so far, and may never will).
The difference is that the professionals have hundreds of bitty reasons as to why this doesn't fit the reasoning they have built up studying the fractal minutia of their worlds.
THis blog would be pretty empty place if we didn't discuss the small waves that go to build into a potential rogue wave. You may be right, your prognostication may be the outcome, but how we get there is the path we discuss.
So back to both Mr T and Truthhurts points.
Basically the old macro rules don't work due to CB policy being different this time and huge portfolio shifts occurring because CB policy is different this time.
So CB policy is different this time and that seems a slam dunk as far as consensus goes. Perhaps the fun proposition for discussion would therefore be -
'As the theory that 'it is different this time' is usually ultimately disproven, can we therefore suppose that CB policy is not different this time at all?' Discuss....
Pol
http://www.ted.com/talks/nick_hanauer_beware_fellow_plutocrats_the_pitchforks_are_coming
Replyproblems will not come from the politics nor the economics but from the social
http://imgur.com/cSVuZ3K
Replyinteresting chart of US short term unemployment and average hourly earnings.
Current short term unemployment is near cyclical lows (it is LT unemployed that is still elevated) so one would think that wage pressures should be building as was the case before, but it hasnt really happened this time. so we either get a lower rate of short term unemployment (less friction in markets bc of internet job search?) or perhaps it is the LT unemployed that at the margin are the source of wage pressures (which seems counter intuitive ) in which case Yellen may be correct after all.
Pol said - "Basically the old macro rules don't work due to CB policy being different this time and huge portfolio shifts occurring because CB policy is different this time. "
ReplyI don't think CB policy is driving all of this. Corporate buybacks, for example, I think are more a function of lack of return in additional plant than because of the 'cheap credit lets arb the capital structure' CFO plans. If you think its the latter then I guess its CB driven.
Pension allocations are a little trickier, and are certainly rate related, but lets face it most were screwed at 5% 10yrs too - their required returns are just too high for a low-growth environment. So if ST rates jumped to say 3% you might get a rebalancing effect, but longer term its not like the pension can go all in on a 3% trade when they need to make 7%. So unless Yellen has a way to combat the aging demographics, this too is not under the control of CB. Lets just not discuss the downside if the market were to be flat to down as payouts ramp up.
Passive index investors is probably the group that has the highest relationship to rates, as at each rate change there will be some group that decides to reallocate based on their own needs, but minus the required returns of the pensions. While rates matter here, I think other factors matter more - for example buying the SP500 has turned into a giant momentum trade - people are buying it because its performance is the best. Momentum psychology is notoriously fickle, and will probably have a greater effect on prices than rate changes.
So I guess what I'm saying is that I disagree with your assertion that "portfolio shifts occurring because CB policy". There is a confluence of factors driving the markets in one direction and rates are not the only thing. Which shouldn't be much of a surprise, right? Otherwise, tapers and the occasional fed rate threat would have bigger effects on the markets. By my counting, the SPX is up 12% and 10yr yields are lower by 50bp since taper was announced.
One of the theories I hear from time to time is that the market is a short because one day there will be this Minksy-moment when collectively everyone realizes that Yellen is just the 'man behind the curtain' and our trust in CB policy has been a mistake. But maybe the market is looking past all that, maybe after all the bluster the market just simply does not care about the fed, or the fed policy. Subtle rate adjustments, economic slowdowns, inflation expectations, geopolitics etc - none of this will really change their target allocations, ergo the whole theory is moot.
Mr T, nice example of second level thinking. Too bad you didn't get elected for the jury.
Reply"Macro Man's opinion and two bucks will get you a cup of coffee and not much else"
ReplyOnly gets you half a cup in Sydney...
Speaking of Japan trading houses , it would pay to stop and notice that you can pay what you want for the daily research notes, but you should know that the research desk was created for only one segment of dinosaurs on the desk..before you trade it , do you really think you can tie those guys shoe laces up on a fat day when the market throws another one at you one after the other.You don't come close.
Replyamp...
Reply“. . . you’ve paid the price to come so far
Just to wind up where you are . . . ”
Anon.
ReplyAgainst the confidentiality agreement..
Research notes trade setups didn't workout and I asked the house if there was any chance of them defraying my cost somehow.
Returned note
Fuckoff and leave us alone!
.....you believe that!
ReplyReturned back.
Sorry if I upset you, but why don't we sort this out like gentlemen. How about you jump on your private jet , fly to Sydney and we can find out for ourselves if you still have that right cross from your university days. Be glad to help b/c I know how hard it is from where your sitting.
Goodluck with that..when you done we'll see out there..
Replyhttps://www.youtube.com/watch?v=dxtb2XeYmlw
10 years later....
https://www.youtube.com/watch?v=dxtb2XeYmlw