A Generation Of Rate-Hike Rookies Makes Jeff Gundlach Nervous

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)