Hell To Pay

We predicted in our last post that Fed commentary over the near term would not support the notion of an early withdrawal, a near-term change in policy; that policy makers would hold the course – known hawks would remain hawks, and know doves would remain doves. That worked. The April 30 - May/1 FOMC minutes released 5/22 supported our notion even further.  Fine.

Then things went haywire. We witnessed Bernanke’s testimony yesterday, which was consistent UNTIL the q&a, half an hour later, when Bernanke said, “If we see continued improvement and we have confidence that that’s going to be sustained, then we could in the next few meetings, we could take a step down in our pace of purchases.”   Bond prices collapsed.

What a mess. Central bankers do not understand how to communicate with the market crowd and they never will. Thus, discretionary policy making is a fool’s errand.

Bernanke doesn’t know any more than most of us what to expect of the economy just ahead. But any crowd demands a god; the days of the Bastille and butchery on the streets have passed but there is still butchery to what was once a thriving economic machine, where decisions were based on known rules, and supply and demand were the clearing mechanisms. Now we have the decentralized auction arena replaced by a command center. Bernanke is the market’s god and when he is wrong, and he will be, the market will turn on him with a vengeance.

Market violence is good stuff for Street types, who buy and sell volatility for a living for example. But there is a higher calling. This higher standard is not a dream; it is a realty, one 226 years of age; it is that insight of a few individuals placed on paper one muggy summer in Philadelphia, from which we understand that we Americans can expect to conduct our lives free of constraint, free of discretionary government, free of interventionism, with anchorage provided by a rule of law; and, that we are to respect the intent and the property of those others so occupied.

With a government agency (independent or not) picking winners, there will be hell to pay.


Robert Craven
 

Unhinged?

Early on we predicted a slowing for H1, and lower interest rates; that is, a sub-read, most key releases. April NFP and the Feb/Mar revisions seemed to make us out to be unhinged.

Naturally it is easy to cherry pick, to fetch results which fit a bias.  In economics, it becomes an addiction for many, a drug to ease the pain of being wrong. Guarding against just that, let us state that the April NFP read does not indicate better times ahead, but is consistent with a slowing economy, thanks partly to the big drop in hours worked. We all know about this one – private hours were off 0.4% and manuf hours were off 0.2%; aggregate hours for all employees were off 0.4%.  Finally, an outdated seasonal added about 50M jobs.

Background: We have an administration hostile to job creation, actually hostile to free enterprise. You’ll find that out personally if you’re the fiftieth worker to be hired (sorry) or think you might receive credit at the I-Hop for working over thirty hours.

So past Friday’s celebration, prepare for this reality – a slowing into H2. One way to do that is to expect the recent, substantial losses in longer FI prices, to be reversed. The market crowd detected that such a “robust result” as that of Friday will persuade the Fed to reverse course sooner than expected. Fed commentary over the near term will do nothing to support that premise.


Robert Craven
 

US Strategy

We can expect our anchor to hold – economic reality over the near term will disappoint. Thus prepared, traders can set up for key releases. We may miss a few as there are no straight lines in this business, but this represents the trend, as predicted earlier.

The general flaw common to street analytics was birthed not by analysts’ failure to capture traditional relationships but by their failure to understand that traditional relationships no longer matter.

The economy is rigged; it is phony. Risk takers in this democracy are accustomed to a rule of law; when there is none, when planners are at the helm, risk takers withdraw. Central bank policy making in the US is 1) discretionary and 2) unpredictable. The Fed has eviscerated traditional and essential market functions. Nothing good can come of this and nothing good will, especially when compounded by the administration’s interventionist policy making - if the Fed don’t scare ya dear CEO, then Obamacare will.

From late Q4 we advised readers and clients to look for “surprising” weakness, H1, and presented a detailing of the reasons why.  We were a tad quick on the draw; events did not initially cooperate but most are now cooperating rather nicely. 

Translation: Early and mid Q1 we suggested using the simplest of spreads – the term structure – to translate. This spread was sold or could have been sold at levels approaching 112, 5-10 yr, and 290, 2 – 30.  Last, 99, 264.  The spread is not as useful now as it is more directional; no matter; there exists a galaxy of other tools available to translate a withering US economy to the bottom line.


Robert Craven