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The Fed Is "Confused & Confusing"
Via Scotiabank's Guy Haselmann,
Too Clever By Half
Yesterday I received an email from a well-known hedge fund manager which in its entirety read as follows: “At the end of the day, the Fed is confused and confusing, so if you spend too much time addressing their comments you end up confusing as well”.
In this light, I will detail one observation in this note that leaves me to conclude that the post-FOMC market reaction is farcical. Bear with me while I explain.
The FOMC meeting was slightly hawkish for two simple reasons.
1) The Fed slightly moved forward its time frame for the first rate hike to the April-June time frame when Yellen stated, “It is unlikely the Federal Open Market Committee will raise rates for at least the next couple of meetings”. This statement is indeed wishy-washy enough as to allow the Fed flexibility around the comment; nonetheless, the center point for ‘lift-off’ was moved forward.
2) Yellen said the drop in the price of oil would have a transitory effect on inflation and was seen as “tax cut” for the consumer and businesses.
These were the only new pieces of information that emerged from the meeting. How would a day-trader have reacted in normal markets? The US dollar would have risen. Oil would have fallen despite the rise in the dollar. The front end of the Treasury market would have dropped (i.e. higher yields). And, equities would have gone down. All of these occurred except for equities which exploded higher in wild grab-fest fashion. Why?
The explanation centers around the fact that the Fed left the words “considerable period” in the statement, even though the Fed changed how it used those words. Many headlines read, “Fed kept considerable period”. This is misleading. The FED did NOT say that it “expects to maintain the target range for the federal funds rate for a consider time”. Rather, the Fed kept the original language that it expects to maintain the target…..for a considerable time following the end of its asset purchase program in October. There is a big difference between the two.
Why make it backward looking? Using the statement in this manner is no different than saying, ‘we still believe what we said at the last meeting’. The markets already knew the Fed expected rates to be maintained after the end of QE, but what about its assessment from today forward?
They actually even changed how the words “considerable time” were used to make them completely meaningless. They wanted to emphasize the word “patient” (even though the market already knew it would be patient). In order to keep the “considerable time” words, the FOMC said its patience is consistent with that earlier statement of “consider time”. If they did not do this in order to purposefully make sure those exact words were in the statement, then the entire sentence is completely meaningless.
The reason the Fed likely went to such “too clever by half” efforts to make sure those words remained in the statement in tact is because they knew the press, HFT (high frequency traders), and algorithmic models would data mine those words, triggering a buy signal. With market liquidity so compromised, HFTs can push markets around easily and they certainly did.
The Fed is very nervous about disrupting the apple cart after (arguably) fueling asset bubbles, so whenever they do anything hawkish, they cleverly try to also serve-up something dovish to the markets. I called this the “Great Aunt Addy Strategy” in my August 18th note in memory of my Great Aunt Addy who drove with one foot on the accelerator and one foot on the break.
The Fed did the same thing earlier this year, when it simultaneously pared the QE program (hawkish), while offering ‘forward guidance’ (dovish).
At the end of the day, the statement was hawkish. Most risks seekers I speak with say they will stay as aggressive as possible until the Fed hikes rates and then they will “get out”. This is the greater fool theory to believe the market is deep enough for so many to “get out” at the same time with poor liquidity conditions.
* * *
I remain a bond bull. Most roads lead to a win-win for long dated Treasuries. If the Fed hikes early, I expect it will upset risk-on trades and flush people into Treasuries while reassuring that inflation will remain in check. If they don’t hike at all in 2015, I suspect it will reflect global anxieties or a problem that morphed from the many troubles brewing abroad. This may lead to fears of a broader slowdown prompting yield seekers to act more cautiously and gradually migrate to Treasuries.
It is time to cover Treasury shorts in the front end and unwind flatteners (our strategy into the FOMC meeting). The market is giving active managers a great opportunity to go outright long the backend of the Treasury market at these post-FOMC improved levels. PM’s should also use this opportunity to take down low-quality credit and beta risk. Stay short oil. And yes, sell equities. For long only investors, I advise sector shifts in defensives like healthcare, staples and utilities. There are also certain financials that will benefit from a Fed rate hike that looms in early 2015 (this is only a short term trade).
Unfortunately, the markets’ outsized and illogical reactions are signs and symptoms that financial markets are broken. The FOMC’s meddling in financial market behavior could easily catch up to them in an ugly fashion.
“The world is just illusion, always trying to change you.” – VNV Nation
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The fed will NEVER raise rates.
the fed is Dumb and Dumber
does anyone really believe, what with all the NAFTA, off-shoring, H1B visas, cheap illegal labor, anti-small-business regulation, foreign aid, trillion-dollar wars, Obamacare, etc, etc, ad naseum, that these folks don't know what they're doing?
Yes, because they're going to break the very infrastructure that their paper wealth depends on to keep them fat and sassy. They is no symbotic relationship here, they are a parasite that is going to kill the host that they depend on for their very survival.
"Confusinged"
"Conflushed" is what they are on the verge of...
Nope. They can't raise rates on nearly $19 trillion of federal debt.
Do you have a son named Ken by chance?
I don't think that it would matter if the fed did raise rates in the long term. I don't think that the fed has control over them anymore. I think that rates are going to do what rates are going to do, the Fed Funds rate and IOER not withstanding, and at best, the fed is going to find that it is controlled by rates. I expect shit to get caddywhompus here. Junk bond yields could go to the moon while UST yields could hit the floor at the same time.
Yes - a Fed rate increase, would have the effect of increasing the spread in the Yen carry trade, wouldn't it?
It was control by chaos, but now by chaos and confusion.
A bunch of bad actors. I'm glad I don't have to act stupid to feel important. What a paradox.
But then again the oldest profession is to fuck people for money.
The makets are the markets, they cannot be broken ... they are just manipulated and controlled
Banksters “print” more money than ever!
http://failedevolution.blogspot.gr/2014/06/us-debt-held-by-federal-reser...
This article's entire presumption is wrong, wrong, wrong!
It presumes the Fed spoke and the market reacted.
The Fed is the market. What happened was the Fed spoke, the Fed hit the BUY-BUY-BUY button, people cheered, and then the MSM proclaims that everyone is buying stock.
no, no, no, didn't you see? the rig count is down this week.
who heads the fed ?
bunch'a ekonomists ?
all of a sudden everything seems somehow clear...er
[clear...er does not mean less confused]
How can anybody be confused by what the fed is saying? They are practically telling people to BTFD.
The herd must be driven to market, of course when they get there....
It is pretty clear what they are saying. What to do about it is not so clear.
"confusing"?
maybe for humans
but language not directed at them ... if you get my drift
Does not compute...
hey... I am not economist... but what if the FED are the only guys buying the market and making it sizzle? what happens when they own it all and there nobody to sell too? rollacoaster down?
People in Belgium buy when the FED sells and then they sell it back to the FED. Rinse, repeat.
Oh to bea Belguim
I'm not going to say the Fed is or isn't buying the market, but say that they are, and they get to the point that they own everything that everybody is willing to sell. Have you ever played hot potato with yourself?
Santa Claus is buying
If/when the FED owns the entire market, why would they need to sell?
Then they would privitize the good shit, and keep the useless shit for the rest of the sheep to piddle over. They'll keep the divies, profits and control like never before.
There is a big diffirence between “considerable time” and “considerable period”!
No there is not just mindfucking ya like the FED.
Thinking of the FED and its members who are a bunch of lying, thieving, robbing bastards - I get a lot of enjoyment from this video....
https://www.youtube.com/watch?v=QRVPr1FeWMk&feature=youtu.be&utm_source=...
So now the FED runs the whole show. Valuations, profits or any of the other fundimentals no longer matter.
How can anyone call this a 'market'? How can people put their EARNED money into this when their only justification is hoping the bank will blow dollars their way.
The endless charts and articles explaining this and that are totally irrevelent in this banker controlled market world where nothing can be valued or priced.
But many seem to buying into this insanity. The banksters have spun the roulette wheel and no one knows where it will stop.....but stop it will. Then what?
"The banksters have spun the roulette wheel and no one knows where it will stop.....but stop it will. Then what?"
The "roulette wheel" will stop on destitution for the American people, but guillotines for the banksters.
Guillotine the Fed!
The banksters need to repay us.
A friend of mine has a supply of ammo. He recently, after reading Griffins Jekyll Island book, added a "bankster box" to his supply. He says, "It's an extra box for 'dealing' with the banksters."
Lets sing an early Happy Birthday to the FED - Dec. 23, 1913. 101 years young......
Dec 23......isn't that also Festivus?
"The Fed Is "Confused & Confusing"
I'm not confused, the Fed is theft.
The banksters need to repay us.
Guillotine the Fed!
i'm not really confused, i'm sure the hook has been pretty well set, you can hear freshly oiled sheep shears in the back ground, and we have some of the smartest investors in the world still calling this a "market".
lets start with %ages, we'll start with 50% of americans, govt., public-sector union employees, and the fsa, rightly or wrongly, their dependent on govt., for survival, enrichment, and benifits, and are seemingly satisfied, doing little to change their lives, or the system.
90% of americans couldn't tell you what the BIS, the fed, or cb.'s are, or who yellen is, or could give a shit what she says.
99% of americans are conned by the anti-american, public-sector union employees,politicians, k-12 teachers, college, and university facualty