Breslow: "Memo To Traders: The Fed Is Making This Up As They Go Along"

Having returned from a brief hiatus, Richard Breslow, a former FX trader and fund manager who writes for Bloomberg, is back with some much needed warnings.

Maybe traders really do prefer to be kept in the dark. We clamor constantly for better communication and a detailed plan. But it’s difficult to look at where global markets are trading and conclude there’s any penalty for the utter lack of clarity. It seems that everyone has simply concluded that you have your priorities and I have mine: and John Nash had better be right.

As a result, there’s a remarkably upbeat tone to investing despite a list of potential market-disrupting risks as long as your arm. The zero interest-rate world has left investors with zero interest in anything other than finding whatever pays some interest

In the lead-up to the March meeting, Fed speakers were hawkish and seemingly “orchestrated”. So what do they go and do? Deliver a hike that was taken as dovish. And now we’re all sitting around hoping the slew of speakers this week will tell us what they really meant. Why does anyone think there’ll be clarity with a shelf-life beyond this week?

Memo to traders: the Fed is making this up as they go along, too. How can they not? And they also have their legacies to worry about, on top of everything else

To make matters more amusing, there’s now a lively debate on best tactics for balance sheet normalization. In a world where smooth financial conditions are the de-facto third mandate, chest thumping about doing it with other than terror-induced care is just for entertainment value

So where does this leave the 10-year? Smack-dab in the middle of the year’s range. It’s not a stable price, we all know it, and there’s nothing to be done about it

Meanwhile, G-20 fumbled the ball on trade. So the MSCI emerging-market and currency indices decided to fly. Sure, why not? Want to know why? Traders are making a big bet that rates aren’t normalizing anytime soon, the dollar will, by hook or crook, stay soft and available, and that China and the rest of the world will figure out how to keep goods flowing for the next four years. And they want the yield now

There’s comfort to lazing in the dark, as long as you can ignore the thought of what a sudden bright light might show is making those scratching noises.