Notes From Underground: She Does It Backwards and In Heels

Commentators on dance technique always maintain the Ginger Rogers was a better dancer than Fred Astaire for she performed everything he did but “backwards and in heels.” At today’s press conference the financial markets were left with the sense that Chair Yellen wants to rollback the massive balance sheet promulgated by Ben Bernanke. The most “hawkish” piece from the day was when Yellen said it’s not unhealthy to have a gap between the FED and MARKET EXPECTATIONS.

Hallelujah! Rick Santelli has been promoting this for the last seven years and hopefully Yellen’s efforts will result in the end of forward guidance policy. Yellen said she felt comfortable in taking this path because even professional forecasters were acknowledging similar data on global growth. It’s interesting Chair Yellen would make use of the work of professional forecasters (Wall Street economists, I assume) as the Fed employs thousands of researchers. More importantly, if the professional forecasters have relevance why would the FED continue to provide forward guidance as a tool? Why not let market participants act on their own, utilizing the output of such professional forecasters?

Yellen also noted that recent low inflation data was due to lower cellphone bills and pharmaceutical prices, replacing Draghi’s transitory energy data with one-off lower consumer costs. But if Yellen is ridding us of forward guidance this will allow her to leave the dance floor with her head held high.

In my opinion, the best question in the press conference came from a BLOOMBERG reporter who inquired about the Fed’s continued reliance on the NAIRU model. Yellen certainly danced this backwards as she maintained the relevance of NAIRU (Phillips Curve). It is very difficult to pin down the longer run normal rate of unemployment–and there is a great deal of uncertainty about it–especially given the fact that the so-called Phillips Curve appears to be quite flat. That means that inflation doesn’t respond very much or very quickly to movements in unemployment. Nevertheless, I believe that relationship remains at work.

We have seen that operate historically. Chair Yellen sticks to a model that has failed to be predictive in recent years because of the impact of globalized capital being able freely to roam the globe in search of the cheapest wage centers. To what history is Yellen alluding? The 1960s and 70s when the global financial system was saddled with exchange controls, strong private sector labor unions, expensive weak transportation and half of the globe’s population locked in servitude to totalitarian societies. The BLOOMBERG reporter pressed the question (I wish I knew his name for he deserves recognition) but Yellen danced it off the floor.

From the trading perspective, the yield curve flattened to 80 basis points, gold rallied then broke as the press conference developed a “hawkish” tone. Equities were mixed after rallying, then selling and basically closed unchanged. I warned last night to be patient and wait for the market to digest the contents of the FOMC statement and the Yellen press conference. Friday’s closes will be very important to take a full measure of the market’s analysis of the Yellen efforts to reverse the FED‘s QE to what Peter Boockvar refers to QT, or quantitative tightening.

The FED let us in on how QT will work but provided no firm date to its beginning. The numbers the FOMC presented suggest a possibility of the program progressing to a reduction of FIFTY BILLION a month in both Treasuries and MBS, but the only thing I am sure of is Janet Yellen will not be FED chair when the caps reach their maximums.

***Question: My readers know I discussed the buying Europe after the Italian election at the beginning of December and certainly after the FED raised rates in the middle of the month. My question: With the FED in liquidity reduction mode and Draghi’s ECB continuing on a massive QE program, does being long Germany/short U.S. make greater sense today?

This trade is fraught with risk. If you trade it have the position reflect the risk tolerance you are comfortable with guide you. But since the DAX is only 10% information technology stocks any large correction in the NASDAQ 100 will not have as great an effect on the DAX and will align more with the S&P 500. I’m not rushing into this trade but certainly I will continue to watch this relationship for if the continued line from Wall Street is don’t fight the FED well maybe we should change the TUNE to “Don’t fight the ECB.” As always, posing the question outside the world of 2+2=4.

***Thank you Professor Waspi for the chart I am posting tonight. It shows an interesting relationship to times of peak employment/GDP over 70 years. Interesting data point to watch.


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7 Responses to “Notes From Underground: She Does It Backwards and In Heels”

  1. Joe Stoutenburgh Says:

    A year ago (6/21/16) in testimony before the Senate Banking Committee, Chair Yellen, spoke about reduced reliance on forward guidance, which she was careful to note, did not constitute any sort of guarantee as to the Fed’s near term actions.

    I’ll believe it when I see it. The Fed’s entire gambit since 2008 has been to eliminate fear and tamp down risk perception by creating a one-sided credit trade to inflate financial assets by telegraphing far in advance, over and over, rates are low and going to stay low.

    Of course, the opposite is true: to prevent, or at least minimize bubbles, risk and uncertainty with attendant fear of loss must be allowed to have their way in markets. I am not persuaded that the Fed is anywhere near that sort of policy, nor am I convinced that the Fed would recognize a bubble in plain sight (like today’s massive amount of margin debt).

    But in case that ever happens, the forward guidance Genie may prove difficult to put back into the lamp. The Fed’s “transparency policy” has encouraged committee members to speak openly and often to the press for years, led by the grand-master Ben Bernanke’s example. They have eagerly adapted, not only because they love to hear themselves talk, but they have come to enjoy being on the celebrity circuit as reporters and talking heads from every business media outlet record and analyze every golden word to fall from their lips.

    • yra harris Says:

      Joe–really well stated .In juxtaposition Mario Draghi keeps his foot to the pedal on forward guidance.Only Bernanke/Woodford could find comfort in dictating vlalue to the market

  2. Richard H Papp Says:

    Well said Joe. I think the move up in the long bond prices yesterday will assure that the 50 day moves above the 200 day with TLT. And the Fed is again successful in buying more TIME (For Now)

  3. David Richards (@djwrichards) Says:

    Only nixon could go to red china.
    Only reagan could make nice with the evil soviets.
    And only yellen could reverse quantitative easing.

    Funny how things work.

  4. Trader 1 Says:

    Yellen comment on tapering $ Trillion Dollar Balance Sheet = It will be running in the backgorund like “watching paint dry”.


  5. Bradly Maddock Says:

    I am going blind trying to see the chart and way to get a better version.

  6. Chicken Says:

    FED speaks with forked tongue.

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