This page has been archived and commenting is disabled.

A Generation Of Rate-Hike Rookies Makes Jeff Gundlach Nervous

Tyler Durden's picture




 

With the BEA set to double-adjust GDP prints in an effort to help eliminate the kinds of economic contractions “residual seasonality” that showed up in Q1, the statistically flourishing US economy should be deemed healthy enough to withstand the dreaded “liftoff” which, as Janet Yellen gingerly confirmed in a speech last Friday, is still on track for later this year. This sets up a potentially interesting  situation because frankly, no one quite knows what will happen when someone actually moves to tighten policy. As we mentioned last week, global central banks have cut rates 572 times since Lehman or, once every three days.

Even the mere mention of less-accommodative monetary policy by everyone’s favorite bearded bureaucrat back in May of 2013 was enough to trigger EM carnage and as we’ve outlined ad nauseam, it’s hard to say what effect a rate hike cycle will have on credit markets that are devoid of liquidity, although we’ve seen a few examples lately (i.e. the bund VaR shock) of just how quickly things can go awry in broken markets.

Indeed, rates have been so low for so long, that many of the traders who will be on the front lines if and when the Fed ever does decide to start down the long path to normalizing policy have never, in their professional careers, seen a rate hike. Bloomberg has more:

This youth brigade -- call it Wall Street’s class of 2009 - - is about to learn what higher rates from the Federal Reserve look like first hand. Their inexperience has left older, more experienced colleagues wondering how these relative youngsters will fare...

 

While the average Wall Street trader is 30 years old, about 30 percent started within the past five years, according to Emolument.com, a salary comparison website, which compiles data from its 50,000 financial services users. And two-thirds of traders have never seen a full Fed tightening cycle.

 

“What we’ve been through the past four years has been ‘what is the fastest, easiest money to find?’” said El Mihdawy, who studied economics at Columbia University. “If one day that narrative changes and investors no longer believe in the omnipotence of central banks, then it will bring back what was old school -- fundamental analysis and really caring about what’s going on.”

While we certainly doubt that anyone will go back to “caring about what’s going on” anytime soon, what with the Mario Draghis and Haruhiko Kurodas of the world still knee deep in trillion-euro and trillion-yen debt monetization programs, and while we'll be the first to acknowledge that even the industry's most revered vertans are prone to making mistakes in markets which have been rendered completely inefficient (take the Bill Gross bund experience for example), one might still argue that when one in three traders started their careers in the post-crisis monetary twilight zone ,surviving a rate hike cycle in today's mangled markets could prove to be quite the trial by fire.

Then again, as Bloomberg goes on to note, many Wall Street newcomers simply function as the carbon-based switch flippers for the algos which are actually running the show which sets up an even more frightening scenario wherein those with no experience operating in a normal economy with functioning capital markets are in control (or, perhaps more appropriately, "are being controlled by") a legion of stop-hunting, vacuum tubes:

El Mihdawy, who once dreamed of becoming a professional tennis player, now works on Cantor Fitzgerald LP’s equity derivatives desk after joining the firm in 2009. That’s the same year Harvard University graduate Ezra Rapoport was venturing into finance, signing on with Transmarket Group to automate the firm’s bond-trading platform.

 

Rapoport embodies Wall Street’s evolution in more ways than one, including how computers dominate functions that used to be done by humans. Now 31, he’s a trader at Flammarion Capital Partners, a New York-based firm that makes markets in fixed-income futures through automated programs.

 

Everyone at Flammarion is in their 20s or 30s, he said.

Just as we noted back in December, this is the future of "trading": 25-year-olds mining data faster than a fat finger can press buy. Draw your own conclusions about what this means for volatility in a rising rate environment.

 

For more perspective on rising rates and inexperienced traders, see the following interview with DoubleLine's Jeff Gundlach. Here are a few excerpts:

“I became really interested in how wealth is destroyed and how people extrapolate environments forward.”

 

“Understanding the debt pyramid got me to a place that maybe will work in the future”

 

“There’s often one really big issue around which everything else ultimately seems to center.”

 

“More recently I’ve been thinking about two things, [first is] demographics which will help me think about Europe and China and Japan and places like that where the demographic tilt is at historic proportions.”

 

“The second is rising interest rates. The experience that many investment operations have with rising rates for most of us is very low for some it’s nonexistent.”

(Click image for video from Real Vision TV)

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Fri, 05/29/2015 - 17:24 | 6145160 buzzsaw99
buzzsaw99's picture

either btfd or retire. it ain't rocket science.

Fri, 05/29/2015 - 17:34 | 6145201 buzzsaw99
buzzsaw99's picture

"they" just want to generate some fake volatility so "they" can btfd. any rate hike associated selloff should be bought and will be bought.

Fri, 05/29/2015 - 17:24 | 6145161 besnook
besnook's picture

everybody is a genius in a bull market. lol. the carnage will be jump worthy for many and the youtube videos hilarious.

Sat, 05/30/2015 - 14:12 | 6147108 Livermore Legend
Livermore Legend's picture

"......everybody is a genius in a bull market.... the carnage will be jump worthy for many....."

Precisely.

Fri, 05/29/2015 - 17:44 | 6145232 CHC
CHC's picture

"Wall Street newcomers simply function as the carbon-based switch flippers"

 

So - they're kinda like the kid at McDonald's who has to have a picture to ring up a sale?  Or like the same kid who doesn't know how to count out change?  Carbon based.  We've come so far.

Fri, 05/29/2015 - 17:51 | 6145250 kaiserhoff
kaiserhoff's picture

I don't often make predictions, but,

  they will fold, like a two dollah lawn chair.

Fri, 05/29/2015 - 18:32 | 6145378 Nobody For President
Nobody For President's picture

Not to worry.

There ain't gonna be any rate hikes in the foreseeable future.

No how, no way.

Can't be done.

Deep in your soul, ever ZHer knows this...

Fri, 05/29/2015 - 22:09 | 6145928 TungstenBars
TungstenBars's picture

You would be correct if this were a sane world run by rational people. Nothing surprises me anymore. Nothing. 

Fri, 05/29/2015 - 18:35 | 6145393 KingdomKum
KingdomKum's picture

Another bankster offed himself today  -  huzzah !!

Fri, 05/29/2015 - 18:50 | 6145417 Stoploss
Stoploss's picture

Rate hikes are the needle to the bubble anyway so if they raise rates housing blows up again. Then everything else.

Rates will be going lower, however...

Fri, 05/29/2015 - 18:58 | 6145430 Colonel Klink
Colonel Klink's picture

Rate hike rookies?  Isn't that fucking jewbag Stanley Fischer calling the shots behind the scene?

Tick tock bitchez!  We're getting closer to our goal of the whole thing coming apart.

Fri, 05/29/2015 - 18:59 | 6145435 Urban Redneck
Urban Redneck's picture

When they nationalized Freddie & Fannie I telephoned one of my old bosses to "see how his day was going", and after the expected expletive laden rant I suggested he pull in the guys from the emerging and frontier markets and tell the high priced hot shots to sit on their thumbs, since they didn't really know what volatility was.  He laughed and said that legal, accounting and political affairs were "working on it".  Something tells me that if the FED actually grows a pair, and the trading desks aren't up to the job, then they'll simply Rinse & Repeat.

After all we know happened the last time the FED cautiously dipped it toes in the rate hike pool when it was "forced to"... Oh, wait that was like last millennium - Shit! I must be older than I feel.

Fri, 05/29/2015 - 20:35 | 6145724 Captain Willard
Captain Willard's picture

We shall see. The Fed may very well protect the mortgage markets, for obvious political reasons. I would expect the carnage to be concentrated in high yield and EM corporate. Get your popcorn ready.

The question is: will they be able to contain it?

Fri, 05/29/2015 - 19:11 | 6145454 Colonel Klink
Colonel Klink's picture

Don't be fooled, Jeff "GRUNDLE" Grundlach isn't any angel.

http://www.reuters.com/article/2011/07/22/us-gundlach-tcw-lawsuit-idUSTR...

Fuck him about lamenting the system, the same one that made him rich.  Just anotherscumbag!

Fri, 05/29/2015 - 20:39 | 6145718 Captain Willard
Captain Willard's picture

Do you have any insights to offer beyond envy and anti-Semitism? If not shut the fuck up. 

Jeff has forgotten more about bonds than you'll ever know. 

Fri, 05/29/2015 - 21:44 | 6145854 Colonel Klink
Colonel Klink's picture

Go fuck yourself for assuming what you think I know and what I don't know.

I have no envy for some twisted fuck who brings shit like that to his office.

As for my anti-semitism, I display it proudly after much research since 2008 and learning that the entire planet has been fucked over by a small percentage of the parasite class.  Truth hurts there, huh asshole?

Get cancer and die!

Fri, 05/29/2015 - 19:55 | 6145621 CloseToTheEdge
CloseToTheEdge's picture

make that has to be bought

 

note the 2014 Interest Rate derivative contracts...

http://www.bis.org/statistics/dt1920a.pdf

yes, that is 505,454 Trillion

Fri, 05/29/2015 - 20:34 | 6145722 Robert3620
Robert3620's picture

Captain Kirk is waiting for them to raise rates. The real reason for the time travel to San Francisco was to witness what it was like to live in a society with interest rates beyond zero. 

Fri, 05/29/2015 - 20:40 | 6145734 lordbyroniv
lordbyroniv's picture

didnt Wall Street die in 2008?  How come there are so many kiddies still playing these financial games?  I truly cannot wait for them ALL to be out of work.  FUCK THESE MOTHER FUCKERS.  I hope China becomes the new Center of Capitalism.  We dont deserve it !1111

Fri, 05/29/2015 - 21:07 | 6145801 q99x2
q99x2's picture

The neocons will be comng for Jeff soon. Strange stuff going on with Hastert and the US attorney that is stealing peoples small business accounts. Banksters are working their way up the ladder.

Sat, 05/30/2015 - 02:04 | 6146298 DipshitMiddleCl...
DipshitMiddleClassWhiteKid's picture

Jeff isn't part of the tribe, he's a good German guy.

 

 

Sat, 05/30/2015 - 10:38 | 6146724 taketheredpill
taketheredpill's picture

A entire generation of traders and PMs who think stocks always go up, corporate spreads always tighten...

2008 created a lot of seasoned traders but thanks to cost cutting how many are left?

 

The new ones will lose their minds.

Do NOT follow this link or you will be banned from the site!