Russ Certo: "Less Is More, More Is Less"

From Gleacher's Russ Certo

Less Is More, More Is Less

Here are some general thoughts as to what the game plan could or should be as the Fed unveils any number of options regarding interest on reserves or operation twist or other. 

I think it is important to inject simplicity into the machinations of debates and outcomes of prospective policy outcomes by the Fed and the perceived impacts on markets. 

As a rule, I perceive asset purchases, twisted portfolio tweaks, and other maneuvers as tacit forms of “stimulus”.  If one had to align an activity in a “stimulus” or “easing” column versus a “tightening” or “contracting” column, I would place recent Fed buybacks, SOMA, asset purchases, saber rattling, and prospective twists more clearly in the “easing” column. 

Traditional rudimentary easings are long gone and used to be composed of mere rate cuts and rate hikes of funds or discount rates.  Unparalled in history is recent creative  stimulus developments in the form of asset purchases like buying bonds.  However, the marketplace in recent memory has had to contemplate the TECHNICAL consideration and extrapolate what it means for an official entity to actually physically purchase or target an instrument or instruments like bonds or bond purchases.  The technical extrapolation of such would yield certain obvious conclusions, like extrapolated rate forecasts of 1% yields.  Estimates.  Unprecedented. 

However, I urge one to step back from the micro technically extrapolated trees and to look at the macro policy impacted forest.   In some ways, there have been distractions and distortions of “micro” policy gimmicks which have blurred more traditional macro themes which I think may warrant greater emphasis.

Generally speaking value propositions in bonds are marked by steadfast central banking.  Vigilant Chairman’s (not vigilantes), salty dogs, Bundesbank like revile for the impacts of inflation on society and fixed purchasing power like bonds yields.   Easings from Chairman may be bad for an asset that a Chairman has a mandate to protect.  Recall DUAL mandate of promoting full employment and stable prices.  Also, recall the former TRIPLE mandate of moderate long term interest rates.  That has already been abandoned and some how the charter has changed.

There has been considerable discussion recently of “targeting” metrics like employment or inflation and linkages of such to additional or continual monetary policy activity.  I can’t help but to think that the Fed is aspiring for cover by potentially abandoning or prioritizing AWAY from their inflation mandate more towards the benefit of the full employment mandate benefit.  This is clearly controversial debate that I dare elevate such a concept. 

Another concept that can be debated as it applies to policy is that less is more and more is less.  And that markets live in a world of opposites valuation schematic.  More  push on policy monetary easings is ultimately worse for the targeted valuations and less monetary spigot ensures the ultimate preservation of such assets. 

Again, what does this all mean?  It means that similar to the infamous period formerly known as QE2, the market focused on perceived rate benefits (lower) of the belly of the yield curve (the supposed targeted tenor of policy purchases) and yet were overwhelmed by some other technical or macro valuation outcome.  In the fourth quarter of last year, I kindly remind you that the belly of the curve, the supposed target of asset purchases, cheapened in record fashion on a standard deviation basis to the long end of the market, something which bucked or countered the prevailing technical or extrapolated view.

Moreover, I kindly draw attention to the fact that when bond purchases were telegraphed and tapering off, arguments or debates were postured that, “Who is going to buy all this paper and replace the Fed?”   The cryptic irony and pyrrhic victory was that absent the magnitude of $600 billion bond purchases (still $300 billion of purchased ensued of reinvestment of Treasury and MBS interest in Fed portfolio) of additional “easings” or asset purchases, the collective wisdom of the bond market was a repricing in yields LOWER.  World of opposites is the new macro moniker for the key to trade bond markets.

I direct your attention to the pace and direction of stimulus additions at the time to look at the “macro” forest from the “extrapolated trees” to see the outcome of a policy departure was more beneficial to bond market valuations as The Chairman was illustrating sound monetary prescriptions, ones that preserve streams of cash flows instead of diluting them, perceived exitings of easings. 

So, with a morning rant in a pre-Fed proclamation (which wasn’t planned), I can’t help to think that if the telegraphed notion of a twist or a reduction of interest on reserves were to occur today that this could be viewed as a mere TECHNICAL operation but possibly the order of the day is that, this policy is aligned in the wrong column to protect the integrity of purchasing power of bond investors.  A mis-alignment.  World off opposites.  Easings are bad, retrenchments are good.  Twisted. 



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