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Amid all of the fireworks, the FOMC ends up announcing And given my pessimistic outlook on the efficacy of the Fed’s
$600b in asset purchases and $200-300b of MBS proceeds monetary policy, at least as long as IOER is greater than zero,
reinvestment. Belly of the curve is favored, with 5-7yr tenors I expect risk to correct. The $600b figure is well below
getting the most love, while only 4% representing demand in estimates as well, which doesn’t hurt the bear case, neither
the 17-30yr sector. The headline number is well under the does the fact that longer-term Tsys weren’t targeted and thus
trillions being considered and below the $1t+ or so that, in long-term yields (whose decline is one of the most effective
my opinion, has been discounted in the market since late tools in promoting growth and inflation) won’t be depressed.
summer. The Fed did, however, eliminate its 35% per-issue SOMA
limit, and with its small but healthy amount of QE announced
But what is the most relevant new factor in play, now that
today, could be setting up for an essentially indefinite length
Fed day has come and gone? In my opinion, this second
of asset purchases, in an ad hoc manner not ceasing until the
iteration of QE will be no more effective (as per the criteria of
status quo changes to a more positive one. I am bearish risk
the FOMC’s dual mandate) than the first instance. QE I was
in the near-term but am getting bullish commodities and
instituted at the height of the financial crisis and successfully
other inflation plays in the longer-term, as inflation is surging
ended the emergency liquidity situation in the banking sector
in EM and this now possibly implicit perpetual, “until-
by extending banks enough liquidity to return to normalized
needed” easing (and its slightly younger, still-in-the-womb
capital ratios and repair asset-liability mismatches. However,
sibling across the pond from the BoE) brings inflation much
fixing the acute banking system concerns did little to help on
closer to the developed nations.
the real economy level, as unemployment has remained
elevated, near-term deflation and growth risk high, and long- In news flow, besides QE, UK and US services PMI both beat
term inflation risk high and rising. October 2008’s by respectable margins, while US ADP employment and
introduction of the interest rate on reserves, both excess and factory orders both grew at above expected rates. On the
required, has created a liquidity trap within excess reserves. political front, the GOP takes the House, as expected, and
Unemployment cannot tick down until production and takes a big chunk of the Senate, leaving only 51 seats still held
industrial activity picks up, which requires consumption to by Dems. The gridlock in Washington, as I’ve been stating,
pick back up, which will not happen as long as consumers are eliminates fiscal stimulus potential, which merely means it
deleveraging. Consumer credit is still declining, showing that will be transferred to the obligation of Bernanke & co., as
household balance sheets have a long way to go before monetary policy overcompensates. In Europe, Portugal
they’re fixed and that QE liquidity was unsuccessful in opposition party DSP saw its austerity budget proposal get
reaching household balance sheets and thus has not been last-minute acceptance, but the bond market responded far
able to repair household asset-liability mismatches. More QE from in kind, with the 3m yield going to 1.82% vs 1.60 prior
will bring more of the same: more printing, more storing in after its auction. Elsewhere, Turkish CPI grew 8.6% vs 8.0%
reserves, more liquidity not reaching households. consensus in October, with food prices jumping to 17.1% YoY
last month and PPI rising 9.92% YoY. Food and input prices
Since QE I was only a success as far as the banking system is
have been on a tear around the world, with food CPI running
concerned and today’s concerns are about the real economy,
above 8% YoY in China and Wholesale Prices rising 17% in
markets won’t respond bullishly to anything but bullish news
India (as pointed in a recent TMM piece). There has been a
now. More bearish news doesn’t mean more QE—at that
divergence in core and ex-food & energy CPI in the US and
point, more QE wouldn’t matter, because it would mean QE is
developed markets as well, and soybeans and corn prices
not working. I contend that we are returning to an intuitive
both saw 15% gains last month in their futures markets. The
trading environment once again, where good news receives
race to debase is on and fully running and (especially serially)
bullish responses and bad news is discounted in by selloffs.
hiking rates will go from being a bullish signal of growth and
Unless and until the interest rate on excess reserves becomes
recovery to a bearish signal of unsuccessfully attempting to I’m staying short EURNZD still, however, as the pro-risk (or,
curb runaway inflation, at rates choking off any remaining more accurately, inverse-vol—except in the case of USD-
growth in these markets. The RBA’s decision to hike in driven risk correction) proxy of bearish euro sentiment. And
November instead of waiting until next month, despite the with milk/corn ratio (see chart below, courtesy of Bloomberg)
weak CPI print a few days ago, as well as China’s huge GDP at 15 month lows (and frustrated farmers looking to diminish
and copper demand data, underscore this current livestock herd sizes in response to surging feed costs, causing
phenomenon. milk supply to decline), NZD looks bullish as its main export
looks ready for major sector rotation gains and its central
Equity ended the day up 40bps after selling off ahead of the bank continues its hike cycle. EURNZD remains in its range
FOMC release and reversing sharply upwards after the 2:15 between 1.74 and 1.88, selling off from its 200d and range
PM EST announcement. The S&P is right up near resistance channel resistance, netting my portfolio another 140 pips on
around 1200-1220, and I think downside risk is the greater today’s selloff.
risk by far at this level and given current circumstances and
internals. After staying out of shorting the S&P for several
weeks (and long for 110 points from 1040), I went short the
S&P and other US equities into close, looking for a reversal to
begin by the end of this week.
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