A Fed poll

Well, that was...exciting.  The long-awaited return of volatility has arrived with quite a fanfare (or is that a requiem?), with yesterday's whip-saw price action unlike anything observed since the US downgrade furore in 2011.

How crazy was it?  Macro Man got one of those "eurodollars screaming higher, no offers in sight" texts from one of his brokers yesterday morning, even though neither of us are currently in a seat.   One can only presume that plenty of punters who are in seats got similar messages, if not shoulder taps from risk managers.

Indeed, the late-session selling that has characterized so much of this "meltdown" in stocks is highly symptomatic of both margin call-related selling and rebalancing from the uber-leveraged-ETF-that-separates-the-public-from-their-money crowd.

Macro Man was intrigued to see the VIX print 30 yesterday as Spooz shanked 3%; in the good old days before the GFC, 30 was usually a good bellwether for at least a short term bottom.  Sure enough, stocks did rally sharply thereafter, though the above-noted factors knocked them off of their intraday high.

A key question for many investors, macro or otherwise, is how or if the Fed will react to recent developments.  On the face of it, it's frankly absurd to even raise the question.   A 10% sell-off in equities is hardly outside of the realm of normality, and most forecasters still expect US growth of something close to 3% in the second half of this year, with ongoing improvement in the labor market.  The downdraft in energy prices is bad for those involved in its extraction and distribution but good for everyone else; as Polemic has noted in the comments recently, the magnitude of the recent sell-off is more consistent with a purging of financial excess than a reassessment of the fundamentals.

And yet......this is the same central bank that pushed through an intra-meeting cut because of a French rogue trader in early 2008.  The same CB that likes to reference 5y5y breakevens when they tank (even though a prime driver of the pricing of inflation bonds is energy, which the Fed strips out of its own inflation targets.)  The CB that has reminded us ad nauseum  that asset purchases are not on a pre-set path, and that the pace of QE can go up as well as down.

Macro Man isn't naive enough to suggest that yesterday's fixed income melt-up was the result of a sober re-assessment of the likely trajectory of Fed policy.  It wasn't.   And yet, for yields to stay here for any meaningful period of time, it will likely require just such a re-assessment.  An obvious catalyst would be for the Fed to shake up the market's (erstwhile) perception that monetary policy is entering a quiet period on auto-pilot while the FOMC girds its courage to actually start tightening.   What better way to shake up that lazy view (and to show the equity guys that Janet's got your back) than by not ending the taper in a couple of weeks, but extending it through then end of the year?

What do you think?   The blog traffic-o-meter has gone shooting higher over the last couple of days, which is usually a great sign that something has gone horribly wrong somewhere.  Please respond to the poll below to help us gauge whether the expectations for the Fed have shifted....or just the price of fixed income.



EDIT:  Responses here.
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Anonymous
admin
October 16, 2014 at 8:50 AM ×

stimuli are not working. asset prices have been kept at these levels artificially. Fed can't hike.

World is in a balance sheet recession a' la Richard Koo.

ciao f

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Anonymous
admin
October 16, 2014 at 9:42 AM ×

C Says,
I have to say I find it amusing every time someone uses the word "artificially" in the sense of analysing asset value. Exactly, what is "artificial" about a designated institution implementing policy that is goal driven? Exactly, what is unusual about such a concept given that it happens continuously?
Yes, such policy certainly shapes behaviour ,that's why they use it! It isn't however artificial at all.
No, the reality is behaviour that identifies the policy goals and acts accordingly is completely rational as oppose to artificial. What is not rational per se is that the system also provides has much margin to leverage that behaviour as it does. I make my returns year in year out without leverage. Leverage is only required because we have a system that includes intermediaries who couldn't function ,or indeed have a reason for being were leverage not to exist as it does.

Nico,
I hit reset as well. Approximately a 10% correction phase and though it could waterfall a la 1987 that still isn't the probability play.

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Anonymous
admin
October 16, 2014 at 10:42 AM ×

Even if we had expected the Fed and BoE to start considering hikes for next year, Economic data the world over are showing weakness pushing rate hikes to never. We will always find a reason not to hike.

Trick is that the CB role has become too political and as with any subsidy, it's easy to give but hard to take back.
Travis

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amplitudeinthehouse
admin
October 16, 2014 at 10:52 AM ×

Analysis, concur with Pol but don't think this is the spot to jump in.

While I don't think the Yennish fatigue top is in, I rate that 50/50. I have however watched carefully how the dips (Yes, they could be seen on the hourly chart!) were bought after the S&P500 made all new highs and it didn't have the same resemblance as 2011 and 2012.
I'm going to extrapolate this to how we bottom in the short term too.
As for the FOMC..don't care, I'm too busy getting pissed and eating meat pies at races!
Sidenote: This trader is not very technical these days..no Bloomberg here, and can't see myself ever having one.

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Polemic
admin
October 16, 2014 at 10:52 AM ×

And suddenly it goes european. It's risk adjustment with too many people looking in their 2011 europanic handbooks.

Thanks MM for the mention - I ve got lots of thoughts on yesterdays moves and are too long for the comments section here.

Ok .. please add to the question box -

- Do you think Italy or Spain will default in the next three years. - if No then then please don't blame spread moves on anything other than more position adjustments. If Yes, please explain.

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Roman
admin
October 16, 2014 at 11:30 AM ×

Man, its great that you haven't mentioned ebola. I was really afraid to read about fixed income relation to ebola on this blog.

On the other side, sigh - taper. I thought this meme has died already, but it well and alive.

I wonder how complicated decision about trade should be when one sees bonds spiking 5 full points? You don't need forecast what Fed going to make a decision how to trade massive liquidation.

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Polemic
admin
October 16, 2014 at 11:32 AM ×

And the first fkr to say that rallies in periphery CDS is an indication of greater chance of default gets a personal visit from Mr Redhotpoker.

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Anonymous
admin
October 16, 2014 at 11:46 AM ×

Do you think Italy or Spain will default in the next three years.

No, but I can blame the Italian spreads partly on their latest budget which suggests supply will increase.

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Anonymous
admin
October 16, 2014 at 12:23 PM ×

artificial: made or produced by human beings rather than occurring naturally.

this is not a "natural" mkt. mkt dynamics have been distorted thanks to the policies implemented.

I m sure you understand what I meant.

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Leftback
admin
October 16, 2014 at 12:39 PM ×

The morning's futures seem to suggest that we are still in a bottoming process here.

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Polemic
admin
October 16, 2014 at 12:42 PM ×

Policy makers ARE part of the market as referees and rule makers are part of a football game.

If you want policy and rule makers to be absent then it goes cage fighting.

Problem that folks are experiencing is that the rules set by the rule makers are not clear.

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Leftback
admin
October 16, 2014 at 12:46 PM ×

Price action in USTs is signaling that a short-term blowoff top likely occurred yesterday, lots and lots of volatility. The long-term trend may still be lower but watch out for a retracement ahead.

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Anonymous
admin
October 16, 2014 at 12:49 PM ×

Your poll does not display in my browser...

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Polemic
admin
October 16, 2014 at 12:50 PM ×

MM can you put a link to the results page at the bottom of the post please. Once you've done the survey once you can't later go back to look at the results.

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Nico
admin
October 16, 2014 at 12:54 PM ×

when reality is better than fiction

they are suddenly realizing France, Italy or Greece have done fuck all to improve their finances

insider friends in Italy bought truckloads of equity as a patriotic punt when Renzi came in February

all hope has vanished now and they are horribly under water

we now need one last thing: a French downgrade and a crash in OATs

and to think that the former French head of treasury has recently been promoted to head European budget

those clowns are leading us to great misery

now on the US side

if you are the Fed wouldn't you see some of your treasuries into such strength

they own the market and are sitting on a monster profit

if i were monsieur Fed i would not let it all expire i would give it to the desperate guys covering October in red

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Nico
admin
October 16, 2014 at 12:58 PM ×

*edit: not see, sell

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Anonymous
admin
October 16, 2014 at 1:02 PM ×

C Says,
Pol,
"Problem that folks are experiencing is that the rules set by the rule makers are not clear"
That is exactly the opposite of what I hold to be true. Policy makers I suspect spend too much time trying to work out what the market wishes to hear in order to get them on side. The problem with that is the very success of it holds within it it's own failure. The unescapable fact is when policymakers are what is laughably known has transparent what it leads to is the crowded trade syndrome based typically upon ludicrous leverage. Thereafter that overall position depends solely on everyone carrying agreeing and when they stop and the volatility of disagreement rises as it is now doing we see the result. Summarise that this way, transparent policy that leads to long periods of stability with inevitably lead to instability. Psychologically it can't be any other way.

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Nico
admin
October 16, 2014 at 1:15 PM ×

C

brilliantly said

and it is all about 'ludicrous leverage' indeed

in 2009 some Washington cronies flew to Chicago to convince CME to double maintenance margins so we would not have another bout of crazy ass speculation ever again

CME boss: 'you are asking me to cut my business by half. This is a free country. Now fuck off'

until you regulate markets and decrease leverage on everything, you will have those bouts of insane squeeze followed by correction of the George Foreman variety

from an anthropological angle, it is fascinating to see idiocy repeating, no matter how smart our phones are, no matter how high tech we have become, the human brain is still medieval at best

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Nico
admin
October 16, 2014 at 1:16 PM ×

C

brilliantly said

and it is all about 'ludicrous leverage' indeed

in 2009 some Washington cronies flew to Chicago to convince CME to double maintenance margins so we would not have another bout of crazy ass speculation ever again

CME boss: 'you are asking me to cut my business by half. This is a free country. Now fuck off'

until you regulate markets and decrease leverage on everything, you will have those bouts of insane squeeze followed by correction of the George Foreman variety

from an anthropological angle, it is fascinating to see idiocy repeating, no matter how smart our phones are, no matter how high tech we have become, the human brain is still medieval at best

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Polemic
admin
October 16, 2014 at 1:21 PM ×


C.. I don't disagree as I think the case you make can be covered within what i said.

"Thereafter that overall position depends solely on everyone carrying agreeing and when they stop and the volatility of disagreement rises as it is now doing we see the result.

Isn't that disagreement the result of unclear policy? If it was totally clear they'd be no disagreement.

Eg. ad absurdum - Italian lira is pegged to DEM via Euro.. very very clear. no disruption of markets - until it aint clear.

Most of the debate in recent MM posts has been around Fed policy. The very fact that the poll above gives different results is testament to that fact that policy is unclear and hence we get the swings in guesswork and it's those swings in guesswork that cause the unruly behaviour. .

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Macro Man
admin
October 16, 2014 at 1:39 PM ×

Pol: The response link's been added at the bottom of the post

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Anonymous
admin
October 16, 2014 at 2:03 PM ×

C Says
Pol,
No we're not really saying the same thing. What I am saying is the market wants not just transparency it also want more precision than policy makers can possibly deliver. When I say markets I'm not talking about your average Joe Public I'm talking about those entities who are so leveraged that any necessary change in expectations makes it impossible for them to hold.

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Anonymous
admin
October 16, 2014 at 2:05 PM ×

C - absolutely. Markets should be a zoo of lots of different animals, not a pink flamingo reservation.

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Polemic
admin
October 16, 2014 at 2:11 PM ×


Precision is a subset of transparency in this case then. Noted. And agree that transparency is useless if they transparently stay opaque with the precision.

the leverage issue i surely just an example of having your stops within the envelope of expectations of what is normal ( i.e. leads to disaster). And you are saying that the interpretation of normal is is assumed to be tighter than it is in reality because policy makers aren't precise enough in saying anything.

Or basically -- give a market an inch it will take a leveraged mile? ( agree)

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Corey
admin
October 16, 2014 at 2:53 PM ×

Um Fed?! The Prob is the ECB was supposed to pick up the bAton and they've announced they're going to wait for the r the results of their abs program before doing anythg. By then they will get the most bang for their buck as the market will have had a decent correction. Short term bottom seems in place but I'm watching oil for the all clear.

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Anonymous
admin
October 16, 2014 at 3:39 PM ×

Fed is a good team player

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Anonymous
admin
October 16, 2014 at 3:39 PM ×

C Says
When you think about it this issue is a form of Soros's much discussed Reflexivity. Policy tries to influence the market risk takers and they in turn perform in way which feeds back to the policy makers who then have to find a way of adapting their policy to the unexpected element of the risk takers behaviour. So we could say they are being has transparent has that process allows and the lack of precision is inherent in policy in that it cannot foretell what the market response is going to be until it has happened. Just a way of saying what goes around comes around ;)

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Polemic
admin
October 16, 2014 at 3:51 PM ×

C-
In that case - we are coming from the same place.

Part of the theory that if you squeeze a balloon in your hands a part of it will always pop out between your fingers.

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Anonymous
admin
October 16, 2014 at 3:55 PM ×

C Says
Having reset I find time to read a little more about this Ebola situation. I struggle to find words suitable to describe how this is being handled so I have to fall back on my patented standby "fuckwits par excellence"!
That the people who should be controlling the flow on this think it's ok for someone infected to come into a 'general' hospital enviroment is clueless beyond belief. I happen to have the benefit of the inside track on issues like this has my wife has got 35 years of relevant experience to educate me with.
If they want to play russian roulette bringing any person known to be infected back from the point of origin it should be printed in capital letters a mile high that they can only come to one of the very very few centres that are trained and equipped to handle it. There should be no alternatives ,no stop offs. The average nurse even with some basic training wouldn't be up to dealing with this issue. Next time you are in hospital I suggest you just closely watch the staff and how they automatically use their hands without thought sometimes. Afterwards you won't be surprised that some nurses managed to become infected. Staff who do this job must absolutely be anal retentives !

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Polemic
admin
October 16, 2014 at 4:03 PM ×

And C, the next point to worry about is that the UK Govn crow about the 'centre of excellence' for coping with Ebola in the UK is The Royal Free which is nicely located in the midst of dense housing only because they merged with the old infectious diseases hospital of Coppetts Wood, which was more sensibly an isolation hospital near Muswell Hill. But the point is - how many beds does the Royal Free have capable of coping with Ebola ?


Two


I am glad I am no longer a medical student there.

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Mr. T
admin
October 16, 2014 at 4:20 PM ×

Fed will continue with their planned taper/end of QE. Dot plots might shift with data, but isn't that what they've said all along? Low-rate low-vol is creating spasms of vol in higher-leveraged crowded trades, but its not changing the landscape enough to warrant policy shift.

USD is still the cleanest dirty shirt. Rates are going nowhere. Crude is gonna find support.

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Anonymous
admin
October 16, 2014 at 5:00 PM ×

C Says
Pol,
The reality is our ability to cope with Ebola is extremely limited by numbers. On a very small scale it can be done. Which is why it so important that their first duty is keep those numbers small. If they ever really escalate so that we have to bring into play non-specialty hospitals then we are done. That's the annoying part of what has been happening so far. They don't seem to appreciate the necessity for putting controls on this flow that lock it down. Spanish and US so far have cocked it up badly. We can only hope that they have identified what they have done wrong so far and don't repeat it.

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Leftback
admin
October 16, 2014 at 6:32 PM ×

Agreed with Pol. As long as the numbers are small and you can get your arms round the problem at a top class hospital, this will be fine.

Small numbers of patients at Emory (best in class, center of excellence), deaths + problems = zero.

Bugs Bunny regional surgicenter, massive screwup.

MM, Does Bullard read MM every day for ideas? Slowing the taper indeed... how can they slow the Taper when the POMO schedule is almost over? Silly idea, hopefully this will go away.

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Leftback
admin
October 16, 2014 at 6:34 PM ×

OTOH, thanks Bullard for levitating my Euro longs today! That's put the cap on a great week. Cheers...

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Nico
admin
October 16, 2014 at 7:54 PM ×

talk about a coincidence - just got an email, my great great uncle died of ebola and they have $5m on his account this is amazing that they thought of contacting me

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Leftback
admin
October 16, 2014 at 9:30 PM ×

Thanks, Mr. Whammer. That was a really good read.

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99ProblemsButGGBsAintOne
admin
October 16, 2014 at 9:54 PM ×

While a capitulation day is always 'fun' to trade, the sheer brutality of recent moves underlines how worryingly little risk appetite dealers have in this day and age. If we get some half hearted effort from the ECB a downshift into a low liquidity environment will bring more and more of these moves.

I had to rub my eyes yesterday as ED greens posted 45 odd bps on the day and much the same movement in BTP/Bund this morning. When the capitulation hits the market, there is almost no where to hide.

Polemic:
The ball is in Team Mario's court - if we don't get sovereign QE in any meaningful form sooner rather than later (November meeting), the combination of inflation data with almost every other forward looking metric in Europe poses awkward questions for Italy et al's debt sustainability, so I don't think it's completely unwarranted to go back to the 2011 playbook. The longer the ECB wait, the more 'squeaky bum time' the market will endure, in my opinion.

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Anonymous
admin
October 16, 2014 at 10:01 PM ×

Well, here we are...U.S. Import Activity Surges But Export Containers Hit 4-Yr Low --Cass/INTTRA Sept Ocean Freight Index

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Nico
admin
October 16, 2014 at 10:33 PM ×

regarding dr.Aghi vs. the Ostrogods here is a bit of history

http://www.marketwatch.com/story/germany-finds-historic-parallel-for-opting-out-of-qe-2014-10-14

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Polemic
admin
October 17, 2014 at 6:54 AM ×

Hear hear LB. Well said

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Anonymous
admin
October 17, 2014 at 8:09 AM ×

C says
Excuse the pun ,but a market haemorrhaging is my kind of Ebola. Always a good sign of babies in with the bath water and I think I've got enough of them to see this year out now.

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Anonymous
admin
October 17, 2014 at 8:11 AM ×

C Says
That would be my Ratnerism for the day.

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Polemic
admin
October 17, 2014 at 8:14 AM ×

AS MM Hasn't posted today lets have some fun with respect to BTPs

Monty Python and the Four Italians Sketch

http://polemics-pains.blogspot.co.uk/2014/10/the-four-italians-sketch.html

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Nico
admin
October 17, 2014 at 10:24 AM ×

yo yo someone is trying to squeeze a couple of licorice bears before the week end

1882 first hurdle on spoo

1912-1918 good target for this bounce

3025-3075 for stoxx

i wonder if they'll need a week end bazooka to prop the market to those levels

after which it is a good idea to short again. It is only starting in Europe

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Anonymous
admin
October 17, 2014 at 10:25 AM ×

Pol - as featured in today's alphaville reading links fyi.

northshore

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Polemic
admin
October 17, 2014 at 10:29 AM ×

Northshore -- Ooooo that's exciting. Thanks for the pointer - hadn't been on AV today.

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Anonymous
admin
October 17, 2014 at 2:45 PM ×

Negative rates...C is going to charge everybody with under $15,000 in their combined accounts a $25 fee per month going forward

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Leftback
admin
October 17, 2014 at 2:55 PM ×

Next stop the 200 day at SPX 1910, then a bit more vol until the 27th/Halloween, followed by a quiet period of backing and filling into Thanksgiving? FX volatility seems to be decreasing for the time being.

When do we get the next verbal description of Dr Aghi's magnificent bazooka (the one that is never seen or used, but merely hinted at, with barely veiled allusions to its massive size)?

This could be a tricky month for fixed income, might be a good time to sit on one's arse and collect some dividends while hedging f/i exposure. Wednesday had all the usual hallmarks of a blow-off top. Slow drift in yields ahead.

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Anonymous
admin
October 17, 2014 at 3:45 PM ×

C Says
Anon 2.45,
Must be for the jokes then because the prose and market comments should come with an health warning.

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Anonymous
admin
October 17, 2014 at 4:07 PM ×

DB closed yesterday down 32% ytd & below $30 . One of largest banks in world

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Leftback
admin
October 17, 2014 at 4:30 PM ×

C, I think Anon meant the "other C", Citibank, on negative rates.

A long day ahead for Mr Shorty. Predictable enough. Some European markets are having a +3.0% up day, but as Ritholtz used to observe in '08, this usually only happens in bear markets, almost always denotes a short squeeze and is not a feature of healthy bull markets. Spoos can easily tack on another 15-20 points today, but is this a Dip to Buy, or a Rip to Sell?

Hmm... anyone have any idea when bonds are going to be a buy again? Not for a while, by the look of this price action.

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Anonymous
admin
October 17, 2014 at 4:36 PM ×

C...yes, meant Citibank...as for the prose. I'm from Brooklyn.

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Anonymous
admin
October 17, 2014 at 4:39 PM ×

C Says
Should I sue them on copyright grounds?

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Nico
admin
October 17, 2014 at 4:48 PM ×

it is expiry too today

so even easier to squeeze short through a couple of strikes

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Leftback
admin
October 17, 2014 at 7:24 PM ×

Oh yes, typical expiration nonsense today. Noted. SPX 1900 area rejected at the first time of asking but there will be more attempts. We are back to higher highs and higher lows, at least for the time being. SPX 1905 is where the May low and the August high meet, close to the 200dma, so this area looks like a chart magnet for now.

The 30y was a buy at 3.00% this morning after it filled the gap from the Wednesday plunge, so it's roughly a range trade between 2.70% and 3.00% for the time being.

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Leftback
admin
October 17, 2014 at 8:07 PM ×

Greek 10y down to 8% from 9% today. Europanique averted, for the time being?

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Anonymous
admin
October 18, 2014 at 4:58 PM ×

Here we go again...3 percent down payment for those who cannot afford a home and no forced buyback of fraudulent loans

http://tinyurl.com/pe2ngzo

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John, a small-time retail investor
admin
October 19, 2014 at 3:18 AM ×

A half decade and the S&P has tripled off its lows; but the daily gruel of the American worker has thinned with no significant advancement in real income in two decades; one can imagine an inverse decoupling of the equity market from GDP: equities enter a long protracted descent w/ $ strengthening and a general retooling of the American base in the fashion of 1815-1905; unless long DuPont, Sears or P&G, equities were no refuge in that era, some bonds fared well BNSF, UP, CP, UST, no understand why no 40 year UST.

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Nico
admin
October 19, 2014 at 9:45 PM ×

unless US cos compress labour cost to further, third world levels you could argue that they've reached a peak in profitability in the post-2008 era

wage deflation and ballooning education cost - a tour de force to screw up a nation

meanwhile Chinese labour cost ain't what it used to be i read somewhere $500 p/m average

at this point you'd expect a mounting aspiration for the US to cut down on both foreign policy and investments and yes John, to do more homework at home

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Polemic
admin
October 20, 2014 at 1:34 PM ×

The commentometer indicator still working well !

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Leftback
admin
October 20, 2014 at 7:28 PM ×

A slow squeeze continues.... 1910-1915 area is the next target for SPX, that's the 200 day. A trip to the 1950-1960 area (50 day) can't be ruled out, either. Mr Market likes to mess with people. One bearish observation on the day is that The Carry Monkey doesn't seem to be on board, USDJPY is red, in the absence of US data today.

A lot now depends on government response to the latest outbreak of the dreaded EUROLA virus, with all of its deflationary dangers, especially for the periphery. Dr Aghi is searching for a cure, believing that its origins lie in Frankfurt, somewhere deep within the jungle known as the Buba, where Jens Wiedmann is known to fancy a fruit bat Wurst from time to time.

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Polemic
admin
October 20, 2014 at 7:31 PM ×

Ebola.. as someone said.. more Americans have been married to Kim Kardashian than died of Ebola.

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Anonymous
admin
October 20, 2014 at 7:55 PM ×

JP Morgan: Liquidity appears to have deteriorated across all asset classes.

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Anonymous
admin
October 20, 2014 at 10:24 PM ×

President of New York Fed effectively calls for return to the days of private investment banking partnerships:
http://www.newyorkfed.org/newsevents/speeches/2014/dud141020a.html

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Anonymous
admin
October 20, 2014 at 10:48 PM ×

John 3:18 AM "the daily gruel of the American worker has thinned with no significant advancement in real income in two decades"

Charles Murray saw this coming back in 1994 in his book, " The Bell Curve ":


"Predicting the course of society is chancy, but certain tendencies seem strong enough to worry about:

An increasingly isolated cognitive elite.
A merging of the cognitive elite with the affluent.
A deteriorating quality of life for people at the bottom end of the cognitive distribution.

Unchecked, these trends will lead the U.S. toward something resembling a caste society, with the underclass mired ever more firmly at the bottom and the cognitive elite ever more firmly anchored at the top, restructuring the rules of society so that it becomes harder and harder for them to lose. (p. 509)"

Tyler Cowen’s “Average Is Over ” expand's on this trend.

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Anonymous
admin
October 21, 2014 at 12:34 AM ×

It will even get worse as the elites seize on this new technology...

http://nautil.us/issue/18/genius/super_intelligent-humans-are-coming

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Anonymous
admin
October 21, 2014 at 12:59 AM ×

Smartest human who ever lived? Talk about a paradox. He or she would take one look around at this madness and right jump off the nearest bridge, innit? :)

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