"We Are Still In Crisis Mode" - Trader Warns Fed 'Normalization' Will Expose Markets To Political Chaos

So as the week begins...

  • Global equities are higher, fueled by Emmanuel Macron’s big win in France’s National Assembly election.
  • The euro is virtually flat versus most major currencies as the election results were well anticipated by the markets.

Can both explanations really be true? Yes, they sure can. Bloomberg's Richard Breslow explains...

What we are seeing in the markets today is where asset prices want to go in the absence of new news. Simultaneously, the path of least resistance and infliction of most pain. Call it what you want, but the screens scream happy. It’s summertime, and investors are impelled to keep taking advantage of everything that’s worked so well from policies targeting happy financial conditions.


Sure, the Fed is talking tough. And a lot of other central banks are trying it on for size. “See, that didn’t hurt too bad, did it?” But traders are betting it will all be manana. That no one setting policy will let the applecart be upset and they will so over-communicate that there is in fact no risk. Risk isn’t being underpriced at all. It accurately reflects a sober, and sobering, reflection of ongoing central bank reaction functions.


Which means while we have periodic, real and contrived upsets, they are ultimately dismissed and faded. A discussion of when to buy often begins even before the sell- off. This means that when things do get out of hand, traders will react to it in a clumsy and leaden fashion. And the inevitable cause is going to be something central bank- derived, because it’s the only reality check on carry that they too will be slow to react to.


It’s unlikely to have anything to do with the rather healthy and measured tightening we are going to see. But everyone pushing peripheral spreads toward “risk, what risk?” levels should consider what it might mean when quantitative easing is gradually removed. Unless you actually believe that the ECB will finally abandon the Capital Key and the Macron election will inspire Germany to start writing insurance on Europe-wide debt and financial institutions.


Ultimately, there can’t be normalization without exposing markets to the same concerns as the citizenry at large. The divide in levels of being appalled by goings-on is dangerous and as much a fuel of populism as other, more obvious causes.


It won’t be cured by a couple of disaster-avoiding moments in European elections.


Lack of market-priced implied volatility is a sign of distress, not calm. It means that, quite wittingly, we are still in crisis mode.

Even if Breslow is marginally correct - which he is - political, monetary, geopolitical, fiscal, and economic uncertainty remain entirely un-priced-in by this market...

And while Yellen and Dudley remain convinced they can unwind the Fed balance sheet with no ill effects, we suspect this 'forecast' will be just as accurate as their growth and inflation guesses have been for the last two decades.


Crypto-World-Order (not verified) Mon, 06/19/2017 - 09:25 Permalink

Who is this "we" stuff? Algos will continue to buy until the last plebe is eating out of garbage cans.

GreatUncle nmewn Mon, 06/19/2017 - 09:58 Permalink

That economy that no ordinary people play in no more now resorting to bartering.FED prints and hands it to itself in the end to make the interest payment on the debt.Priceless a virtual debt cycle and if you can see it all people should dump the real economy and let the FED pay itself.

In reply to by nmewn

shizzledizzle Mon, 06/19/2017 - 09:22 Permalink

"Yellen and Dudley remain convinced they can unwind the Fed balance sheet with no ill effects" Neither of them truly believe that, that's just what they are saying to make people believe they have some resembleance of control. 

Silver Savior Mon, 06/19/2017 - 09:27 Permalink

There is nothing normal about the financial system today so I would not expect it to be normalized. A reset would be fine though. A silver or gold standard would be normalization.

J J Pettigrew Mon, 06/19/2017 - 09:29 Permalink

The geniuses with the theories......easy in.......but cant exit.Every person involved in the real world knows that it only works if you can get out without undoing what you attempted to accomplish.The FED spilled $4 Trillion into the markets ... bailing out who....?  we will never know..Now they speak of normalizing....THEY CANT!  NOW, where are the theories?  NOW, how to deal with REALITY...

trouba z ceska Mon, 06/19/2017 - 09:40 Permalink

"What we are seeing in the markets today is where asset prices want to go in the absence of new news."That's all you need to know. DJIA and S&P at ATH, Nasdaq +1%

silverer Mon, 06/19/2017 - 09:42 Permalink

"We've" been in crisis mode since 1913, when the Fed was created. It became a bigger crises when LBJ took the black unemployment rate from virtually zero to 30% by introducing "The Great Society" (welfare, folks). Double down again on the crisis when Nixon pulled gold out from backing the US dollar, abandoning Bretton Woods and putting a turbo on the printing presses. Once more with Billy Boy Clinton when he repealed Glass Steagall, pushed by both bought-out sides of the aisle, which allowed the banks to rush to the casino with depositor's formerly segregated funds. Crank the crisis up another couple of notches by adding a boatload of spending by Republican House speaker Dennis Hastert, after chasing out Newt Gingrich, who by his efforts gave the US under Clinton its only balanced budget in years. (And not balanced since). Then add House Democrat Nancy Pelosi for absolutely record setting spending. Just for good measure, crank on another 10 trillion in debt and a poorly worked out forced-on-the-public health care plan that was called 'affordable', signed into law by some guy from Kenya. Don't forget the banks paying off Congress to get themselves covered by FDIC for their 40 trillion or so in derivative bets that last December when Congress raised the spending ceiling for that Kenyan guy. You know FDIC, that outfit that "insures" US depositors accounts of about 8 to 9 trillion (with FDIC funds of about 95 billion to cover that). And I think the banks are in line in front of the depositors. Now lets laugh at these little additions above to the "crisis", when we know the iceberg has already been hit. Actually, if the US was the Titanic, the ship backed up and hit the fucking iceberg five more times.

GreatUncle Mon, 06/19/2017 - 09:52 Permalink

To normalise the markets you got to pull all the malinvestment out ... then you watch SHTF.So not possible when the only pretence of a viable economy is based on it with that highly valued malinvestment in iit.So now speculate if you instantly burned say $10T of that highly valued malinvestment.Okay so we do it a bit at a time ... nope don't work if you are creating more malinvestment than you can burn out in a go.Trapped ... with no way out.

geno-econ Mon, 06/19/2017 - 09:53 Permalink

Now I Lay Me Down To Rest----The Pension Fund, College Loan, Auto Loan, Mortgage Loan, HealthcareSpiral Unwind will be Normal and Peaceful with U.S. Military Spending and Wars in Middle East also Unwinding with Israel pulling back Settlements in West Bankand Russia accepts invitation to join NATO.  Oh, and the Stockmarket will reach all time Highs ad infinatum.  Ahmen 

gatorengineer Mon, 06/19/2017 - 10:04 Permalink

well what the "trader" misses is that they are endangered.  They have to get rid of anything biological on wallstreet, and have all of the trading done by bots plugged into skynet..... That way the market will never sink.....  Instead of up 20 percent since trump could you imagine the list of insolvent states if it were down 20 instead?

moneybots Mon, 06/19/2017 - 10:10 Permalink

There isn't really any such thing as normalized. Interest rates rise and fall, as they are cyclical. Now is just as normal as any other place on the cycle.

Russdiamon Mon, 06/19/2017 - 10:14 Permalink

Is it really such a bad thing if we do more than just move straight up? Anyways this guy I follow has great market timing, he’s been calling for a drop around this time lately. Seems like this kind of stuff is pointing more to it as well. But I’ve been watching him for awhile and his track record is great. Definitely recommend seeing what he has to say.check this out

decentraliseds… (not verified) Mon, 06/19/2017 - 10:45 Permalink

 Why waste time on this alligator when the swamp’s most critical economic and political problems revolve around the hegemony of a global corporate cartel, which is headquartered in the US because this is where their dominant military force resides. The US Constitution is therefore the “kingpin” of an all-inclusive global financial empire. These fictitious entities now own the USA and command its military infrastructure by virtue of the Federal Reserve Corporation, regulatory capture, MSM propaganda, and congressional lobbying. The Founders had to fight a bloody Revolutionary War to win our right to incorporate as a nation – the USA. But then, for whatever reason, our Founders granted the greediest businessmen among them unrestricted corporate charters with enough potential capital & power to compete with the individual states, smaller sovereign nations, and eventually to buy out the USA itself. The only way The People can regain our sovereignty as a constitutional republic now is to severely curtail the privileges of any corporation doing business here. To remain sovereign we have to stop granting corporate charters to just any “suit” that comes along without fulfilling a defined social value in return. The "Divine Right Of Kings” should not apply to fictitious entities just because they are “Too Big To Fail”. We can't afford to privatize our Treasury to transnational banks anymore. Government must be held responsible only to the electorate, not fictitious entities; and banks must be held responsible to the government if we are ever to restore sanity, much less prosperity, to the world. It was a loophole in our Constitution that allowed corporate charters to be so easily obtained that a swamp of corruption inevitably flooded our entire economic system. It is a swamp that can't be drained at this point because the Constitution doesn’t provide a drain. This 28th amendment is intended to install that drain so Congress can pull the plug ASAP. As a matter of political practicality we must rely on the Article 5 option to do this, for which the electorate will need overwhelming consensus beforehand. Seriously; an Article 5 Constitutional Convention is rapidly becoming our only sensible option. This is what I think it will take to save the world; and nobody gets hurt: 28th Amendment: Corporations are not persons in any sense of the word and shall be granted only those rights and privileges that Congress deems necessary for the well-being of the People. Congress shall provide legislation defining the terms and conditions of corporate charters according to their purpose; which shall include, but are not limited to: 1, prohibitions against any corporation; a, owning another corporation; b, becoming economically indispensable or monopolistic; or c, otherwise distorting the general economy; 2, prohibitions against any form of interference in the affairs of; a, government, b, education, c, news media; or d, healthcare, and 3, provisions for; a, the auditing of standardized, current, and transparent account books; b, the establishment of state and municipal banking; and c, civil and criminal penalties to be suffered by corporate executives for violation of the terms of a corporate charter.