Strategy can be made around Fed policy change if one recalls that any crowd demands a leader, a god. The market crowd is no different; their god is the Fed.
It got him in a heck of a fix just as we predicted it would, but we do at least commend Bernanke as he tries to sculpt an honest and open organization. A recent step was to tell the market that FF’s would remain in the cellar into 2014. He believed it, but it was also what he thought would turn out to be effective cheerleading. And this implied to the crowd that there was a reason for FF’s at rock bottom into 2014; since the Fed says so, it became a reality.
We knew instead that real sector developments just ahead would not cooperate with this view. One of the simplest means to translate that was to own (L – S) the Euro strip, that recommended on Feb/16. That position was taken into and through Feb NFP. The spread Sep/12 – Sep/13for example moved from -13 to -25, our target, on Mar/14. Modest, but better than a stick in the eye.
Since then spreads have come back; part of the reason is Bernanke’s speech last week to the NABE.
Background: Plosser, Fisher and Lacker have all criticized easy policy. Bernanke would not stand for that and so he gave strong hints of further easing in last week’s speech. Bernanke doesn’t think 2% growth can get us to the 5.5% - 6% unemployment target, but that something on the order of 4.5% is needed. Thus, when “twist” is finished in two months, he intends to ease.
But at that time real sector developments will make such a move look reckless. Thus, clients are to monitor the Euro strip for the next chance to strike. Developments ahead will show that FF’s at rock bottom into 2014 is an untenable position. If the strip comes in much further (richer prices, longer end), then look to own it again.
Robert Craven
It got him in a heck of a fix just as we predicted it would, but we do at least commend Bernanke as he tries to sculpt an honest and open organization. A recent step was to tell the market that FF’s would remain in the cellar into 2014. He believed it, but it was also what he thought would turn out to be effective cheerleading. And this implied to the crowd that there was a reason for FF’s at rock bottom into 2014; since the Fed says so, it became a reality.
We knew instead that real sector developments just ahead would not cooperate with this view. One of the simplest means to translate that was to own (L – S) the Euro strip, that recommended on Feb/16. That position was taken into and through Feb NFP. The spread Sep/12 – Sep/13for example moved from -13 to -25, our target, on Mar/14. Modest, but better than a stick in the eye.
Since then spreads have come back; part of the reason is Bernanke’s speech last week to the NABE.
Background: Plosser, Fisher and Lacker have all criticized easy policy. Bernanke would not stand for that and so he gave strong hints of further easing in last week’s speech. Bernanke doesn’t think 2% growth can get us to the 5.5% - 6% unemployment target, but that something on the order of 4.5% is needed. Thus, when “twist” is finished in two months, he intends to ease.
But at that time real sector developments will make such a move look reckless. Thus, clients are to monitor the Euro strip for the next chance to strike. Developments ahead will show that FF’s at rock bottom into 2014 is an untenable position. If the strip comes in much further (richer prices, longer end), then look to own it again.
Robert Craven
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