vrijdag 12 mei 2017

The Fed Is Blinkered, "Times Are A-Changin'"

Having hiked rates into rising inflation and slumping economic growth in March (the weakest quarterly growth for a rate hike period since 1980), and continuing to proclaim a victorious normalization looms, despite collapsing economic data (except payrolls), it seems an auto-pilot Fed is much more set on hiking rates than the market believes...


Somehow believing that storing up short-end ammo for when they are forced by maturation to shrink the balance sheet, The Fed's trajectory is changing fast from the status quo of the last decade or so and as former FX trader and fund manager Bloomberg's Richard Breslow, warns "keep your eyes wide, cause times are a-changin'." Stockholm syndrome gets too much of a free pass. It’s become trivialized by overuse in tawdry crime dramas. But it really is an insidious condition that both weakens the soul and enables the perpetrators. In a world where it’s been all right to resist, it’s the antithesis of impetus for change and a destroyer of animal spirits...


If there’s one thing that continues to characterize and dominate traders’ behavior it’s an intractable belief that economies, market structure and investing paradigms are no longer capable of evolving, let alone improving...


But change is inevitable, as long as the prisoner isn’t killed off first. It’s deeply ironic, and a measure of just how intrusive central banks have become in the functioning, and very essence of markets that it’s taking all the persuasive powers of central bank communication to begin the process. No bond vigilantes here, traders are just too cowed. Investors still think they understand the reaction function of monetary policy makers better than they do. Careful with this one. It’ll take time, but whether it’s the Fed, or even the ECB, eventually they will convince yield hunters that there might be much better levels to get in. I thought yesterday’s price response to a minuscule setback in the S&P 500 was telling. Treasuries turned around, safe havens went bid, the dollar blinked. I guarantee that not a single FOMC voter gave a second of thought to rewriting their next speech on rate hikes and balance-sheet reduction. Markets have been in an absolute tizzy over the China/commodity nexus. China is tightening. How can they justify this when the Shanghai composite is falling? They’ll crater everything, the global commodity complex will collapse bringing down producer economies around the world and inflation targets will become impossible dreams. It’s made for a great story. It’s also nonsense. China’s tightening because they have macro-prudential issues within their own economy to deal with. They had the first quarter outperformance to give them rope to play with. They aren’t trying to tank the economy. They’re taking advantage of the overshoot to deal with systemic issues. Their responsible behavior is being portrayed as out of control because investors have come to take on faith that financial conditions indexes are the only measure of happiness...


Commodity traders who got burned the last two months should reflect on the ongoing efficacy of leveraging up to front-run Chinese buying. And perhaps spend more time on fundamentals. By the way, the Bloomberg commodity index is having a great finish to the week and left behind a significant technical low to lean on if you are bullish. And for that matter, the Shanghai composite didn’t end up too shabbily either. It’s trying to break above the trend line defining the selloff of the last month. But importantly, it’s been commodities leading equities, not the other way around. It’s been a winning strategy to assume that nothing will ever change. But when even a hardliner like German Finance Minister Wolfgang Schaeuble is quoted as telling Spiegel magazine, “There’s no way of forming a community of states of different strengths without a certain equalization,” there may be rewards in keeping an open mind. Just what do investors think will happen when the stock and flow of the Fed Balance Sheet starts to tumble...