Reversals In Progress
From Mark Grant, author of Out of The Box and Onto Wall Street
Reversals In Progress
There are people that are paid significant amounts of money by many large institutions to study each word and nuance of any pronouncement by the Fed. I am not one of them. Often there is so much commentary in the Press that tries to dissect, interpret, and identify each inflection point of the Fed’s minutes that it is not just the minutia where you can get lost but you can hear so much noise that it is quite impossible to hear anything but noise. Usually I do not comment on the Fed’s minutes because of all of this but yesterday’s announcement marked a turning point, a reversal and careful examination and consideration is today important.
First and foremost, the Fed turned off the monetary spigot. Not only was it turned off but eight out of the ten voting members clearly signaled that the tap was tightly closed. Now I had been calling for this while some were rushing around buying mortgage securities thinking the next QE move was going to head in that arena and so I am sure there was a flurry of activity in some trading rooms yesterday as their hopes were tossed into the circular bins where unclaimed dreams perish in the light of the unexpected sun. Then there were those who tried a new spin and said that the Fed’s actions must mean that the economy will be getting better; oh please Cato spare me the ignorance of those that see copper and declare it iron. The Fed’s decision to end monetary easing is a BACKWARD looking pronouncement and while it may contain some hope for the future now that things have somewhat stabilized; it is clearly based upon where the economy was and is and a spin of some other sort is an incorrect assessment. The economic world, for the last several years, has eaten at the trough of the money pumped into the system by the Fed and by the ECB and risk assets have risen as a result while the LTRO injection was partially used to drive down yields of European sovereigns but this game is ending. Money is placed, sustenance is maintained and when the money spigot is closed reversal begins to take place. Over my decades on Wall Street I have witnessed this game many times and while the circumstances are always different; the end result is not. The yields on risk assets will be higher, equities will decline, the Dollar will strengthen and profits should be taken. The sounds of the famous Moody Blue’s tune rings in my ear, “Go Now.”
The other notable point in yesterday’s minutes was the comment that keeping short term rates at close to zero was “conditional.” If there was one word that glittered and sparkled in yesterday’s minutes it was the word, “conditional.” It had been hinted at before but there it was in black and white and all of the reliance by the players in the bond markets that rates were going to stay near zero through 2014 was just dashed upon the stone floor of reality like some Greek taking his glass and smashing it soundly against the cobblestones as he yells “Opa” and dances around in feverish delight. So what was taken at face value has just become a “maybe-maybe” and while Treasuries may head up some as a reaction to the continuing deterioration in Europe; risk assets will probably begin to widen once again as relative certainty erodes and become transformed into relative uncertainty.
Today’s Spanish auction results were, in a word, awful. Not just higher yields, but a terrible bid-to-cover and perhaps even worse; all of the funding could not be accomplished. The effects of the LTRO are rapidly diminishing as the money has now generally been utilized and the national banks of a nation can no longer support the funding needs of the countries in the periphery. We have reached the turn here and I predict much higher yields to come now for the troubled nations in Europe including Italy. What could be accomplished by liquidity has been accomplished but solvency problems cannot be cured by liquidity alone and that lesson is about to be re-learned again.
“You do not have the power to change the winds but you do have the power to re-set your sails.”