Instructive

We see the market mob is desperate for good news, hence the 180 in sentiment with today’s Sep Starts release.  But Starts and Permits have gone nowhere since the 2013 taper temper tantrum and the resultant spike in rates. Plus wage growth is stagnant and credit tight so they aren’t  going anywhere too quickly, too soon.

Recall the Fed miscommunication of June/19/2013. That was destructive and is the sort of foolishness which will repeat; and, this is why we noted yesterday that one wants to own FI volatility at every opportunity.
 

Downhill

We stated in late July that we may have seen the best from this cycle or “recovery,” US side. 

“May have” then, is almost a certainty now; and, may be “more of a certainly” thanks to a German cave in, and even perhaps thanks to the Ebola scare – yet another gift from that continent.

Not all developments have fit into place for us. We made a big deal in 2013 and H1 of predicting declining business confidence but in fact Q3 looks to be fairly strong for capital spending. And we did not predict the recent buoyant payroll reads (but we did maintain and still do that they really don’t translate much - witness today’s Sep Retail Sales print).

However, larger picture: We have been decelerating. Now the pace of deceleration will pick up.

Annualized GDP, H1 2014 is only a tad better than 1% and that is lower than all of 2013, and 2013 was lower than 2012.

Why the creep? It is because Fed policy is a retardant; super low rates are not a spark.  Velocity (GDP/M) has tanked. We know from the St Louis Fed’s work that velocity of the money base is at 4.4, its lowest ever, meaning “…that every dollar in the …base was spent only 4.4 times…during the last year, down from 17.2 times prior to the recession.” We are not launching a satellite. This means that the explosion in the base driven by Fed policy – QE – has failed to spark a one-for-one proportional increase in GDP.

And just ahead?  The longer the Fed extends its largesse, the longer that particular retardant will remain in place.  But the FOMC will panic and do just that – extend their largesse, and so double down.

Finally, how are we to prosper?  The easiest way is to look for every opportunity to own, not to sell, implied (volatility), either on the Eurodollar or note.  And this is because the more Yellen tries to communicate with the market mob, the better are the odds for market violence.  That is baked in and neither she nor any other single individual can do anything about it. It’s too late.


Robert Craven

Cheap Shot

Headline in today’s Telegraph: “Is Mark Carney lacking ‘consistency’ of just confused?” by Andrew Critchlow.

It is not Mark Carney; it is so-called “forward guidance” that is the problem. Carney could be just about anybody.

This is a cheap shot, Andrew ‘ol boy.  Read our last post. The problem is not the personality, it is the method.


Robert Craven
 

Betrayed!

UK financial types went home last Wednesday feeling betrayed by the BofE’s Mark Carney. More than betrayed – bushwhacked! Some even got pretty darn nasty in the press.

Wait until they arrive at work tomorrow morning!

In June of this year Carney reminded the markets that they – market participants - were not up to date, and had better price in a lift sooner than they thought (thanks dad); sterling exploded. Next, last week Carney highlighted the drop in Q2 earnings (-0.2%) and indicated that no, we can now put things off and can wait to lift until wages grow, likely into next year. Sterling tanked. Then this very day, in an interview with the Sunday Times, Carney indicated that he would not necessarily wait for wages to turn positive before the first lift.  My goodness.

This little incident telegraphs the lunacy of “forward guidance,” the latest fashion in central banking.  It can create nothing substantive, only havoc.

Carney and Yellen are mortals; neither has a better idea of what landscape lies ahead than most of us. It is asking too much, for goodness sake. Under King (who saw early on that forward guidance was nothing if not nonsense), under Volker, and under most of Greenspan’s term, it didn’t matter what their interpretation was; we had rules.

In our business – macro economics – all that counts is that one has a better idea of what the real sector will serve up than the next guy.  That requirement has now been downsized; key now, at least for near-to-intermediate term trading purposes is to understand what one individual - a preacher to the market flock - makes of the situation. Our view on economic reality may well be correct but we have to survive the likely event of being trampled by the congregation.

Of course no one feels sorry for traders or forecasters. But “forward guidance” is corrosive past the harm to these types. Markets that swing violently on the expressed whim or conjecture of an appointed god are markets that discourage a healthy auction, or price exchange.  These are circumstances that encourage many corporate planners and risk takers to simply stay put. 

Fed policy is a retardant in the US.  If Carney does not learn to keep it zipped then BofE policy will come to play the same role in the UK.


Robert Craven

GDP - Major Miss, Our Side

Well, that was not pretty.  We had looked for something just through 2% at the very best, Q2 GDP and a negative H1. Instead, we had Q2 at +4% and Q1 R up to -2.1%.

We’re heading out to the corn patch in a few minutes to salvage what’s left as we find the raccoons have been making off with our crop.


Robert Craven

 

Overreach

Yellen told Congress recently that valuations of high-yield bonds “appear stretched.”  The UK Telegraph: “It is quite unusual for the chair of the Federal Reserve to express a view on market valuations, so it is hardly surprising that investors have sat up and noticed.”

It is “quite unusual” simply because most know when to keep it zipped, when they are out of their arena and away from their mandate. 

The respected columnist George Will recalled how the Economist noted last year that, “…Yellen is now poised to take the tiller of the US economy.” From Will: “Oh? The economy has a tiller? And with it, the Fed chair can steer the US economy? Who knew? A touch of the tiller here, a nimble reversal there - these express the fatal conceit of an institution that considers itself capable of, and responsible for, fine-tuning the nation’s $15.7 trillion economy.”

Many fear the next bubble, a yet-to-be indentified excess-gone-to-the-dogs manufactured by Fed largesse. This is not a likely outcome. Instead, our next crisis will be tied to the combination of Fed activism – fooling with the tiller - and the world market crowd’s demand for a god. Thus, if Yellen judges that high-yield bond valuations are inflated, the market crowd takes that as gospel (which is exactly what happened, this incident, as high-yield investors quailed). 

We noted in past sketches that we will have hell to pay. This Fed chair will continue to overreach; the market crowd will continue to react in the extreme (as do all crowds) and the resulting market violence/distortions will help to put this so-called recovery to rest.


Robert Craven
 

The Best May Be Behind Us

For those who may have missed our blog, past weeks, just a friendly reminder – the US economy didn’t going anywhere, H1. 

We will see advanced Q2 GDP this week, with GDP revisions back to 1999; if Q2 breaks much through 2% it will be a miracle. Amazingly, there are still many out there who believe that weather was the main culprit, Q1 (-2.9%) and that we are in for a major bounce, Q2.  Poor little darlings.

We find from last Friday’s June Durables print that non-defense capital goods shipments, ex-aircraft - the measure used for calculating equipment spending - fell 1% in June, fell 0.1% in May (R from +0.4%) and fell 0.3% in April. Capital goods shipments were supposed to be part of the “big bounce” in Q2 GDP. Nope.

We suffer under a “progressive” administration and now we have a “progressive” as Fed chair. There is no sanity in that.

As a direct result, corporate risk takers are simply not “taking” any. That means non-residential fixed investment will increase about half of what most expect, H1.

We will witness the June Payroll release this Friday.  May headline figures looked to be buoyant, misleading many observers.  Come on now.  About 70% of new jobs created year-to-date have been voluntary part time jobs. These don’t carry much horsepower for goodness sake.

Our problem is that for the time being at least, we cannot translate macro insight to the bottom line. This is because in the fixed income markets, central banks are now seen as governors (of the lawn mower variety).

The distortions triggered by an activist Fed chair will continue to act as a retardant.  We may have seen the best from this recovery.


Robert Craven