Pink Tickets on QT Days

By Kevin Muir

I know I have told this story before, but it bears repeating. Way back in 2011 I was watching the S&P like a hawk. Trading each squiggle, I tried to understand what was driving the markets at every point. I focused on technical levels, monitored the news and spent way too long staring at the screens.

But on some days, the stock market would get mysteriously strong. It would usually occur mid-morning. Often stocks would sag near the open, look like they wanted to break lower, when all of a sudden – out of the blue – stocks would go bid. I couldn’t understand it. There was no “reason” why they should be rising. Yet they did.

It took me a while, but eventually, I figured it out.

Although it flies directly in the face of Dr. Malkiel’s Random Walk Down Wall Street, the days when the Fed expanded their balance sheet through bond purchases resulted in outsized stock market gains. These bond buys were conducted through Permanent-Open-Market-Operations (POMO) and the great thing about a transparent Federal Reserve is that they listed the schedule in advance, so it was easy to measure the relationship between POMO operations and stock market performance.

Continue reading Pink Tickets on QT Days

The Fed Model

By Kevin Muir

Way back in 1997, the Federal Reserve surprised the financial community with comments relating to the S&P 500 and interest rates.

“The run-up in stock prices in the spring was bolstered by unexpectedly strong corporate profits for the first quarter. Still, the ratio of prices in the S&P 500 to consensus estimates of earnings over the coming twelve months has risen further from levels that were already unusually high. Changes in this ratio have often been inversely related to changes in long-term Treasury yields, but this year’s stock price gains were not matched by a significant net decline in interest rates. As a result, the yield on ten-year Treasury notes now exceeds the ratio of twelve-month-ahead earnings to prices by the largest amount since 1991, when earnings were depressed by the economic slowdown.”

They even went as far as to include a chart of the S&P 500 earnings-price ratio versus US 10-year Treasury note yield.

Continue reading The Fed Model

Making (of) a Statement

By Jeffrey Snider

I am decidedly in favor of going back to the way it was twenty-five years ago. These constant communications from the Federal Reserve, designed to increase transparency, have accomplished the opposite. Alan Greenspan was made famous for first being an accidental genius (no, it wasn’t massive offshore monetary growth that made the Great “Moderation”, it was 25 bps moves one way or the other in the federal funds rate!) but more so he achieved celebrity for fedspeak.

This latter term referred to the “maestro’s” keen ability to string together often nonsensical terms that were purposefully nonsensical but were reported upon by a dutifully obedient media as if it was all golden wisdom received directly from the mouth of King Solomon. Ironically, it was Greenspan who fought the hardest against conducting monetary policy out in the open; the more he resisted with obfuscation, the more it made him a TV star (if little else).

We don’t know for sure exactly when the central bank switched to a federal funds target. The FOMC did so in what were by comparison the Dark Ages. I don’t mean that in the respect that the Fed simply acted in complete secrecy and darkness; rather, policymakers realized that after the seventies the monetary system had evolved in such a way that they could no longer define let alone measure money (missing money). How do you conduct monetary policy without money?

Continue reading Making (of) a Statement

Citi Economic Surprise Index Fell Since December Rate Hike

By Anthony B. Sanders

Fed Holds Target Rate The Same

Well, The Fed gave their expected news: no rate hike at the May 2nd meeting and they proclaimed that inflation is just around the corner.


Bloomberg: The FOMC’s two-day meeting followed the release of data Monday that showed inflation measured by the central bank’s preferred gauge had hit its 2 percent target after being below that goal for almost every month since April 2012.

You mean that the core PCE deflator YoY wasn’t 2% in January through March 2017??

Continue reading Citi Economic Surprise Index Fell Since December Rate Hike

Powell Has a Plan

By Kevin Muir

It’s never easy being a central banker. Too many of us, with the benefit of hindsight, look back and proclaim judgment on policies they took (or didn’t take) often forgetting that the future is never easy to predict. I am by no means innocent of this charge. I take potshots at central bankers all the time without consideration of the difficulty of their jobs.

Even the most revered central banker in history, Paul Volcker, was only admired years later.

Amid his administering the harsh medicine to stop spiraling inflation, there were howls of protest from the public who were being squeezed by the high cost of money. And by no means was Wall Street all-aboard either. Here are some of Volcker’s own recollections of the period from a 2013 NBER interview:

Continue reading Powell Has a Plan

A Look at Fed Days from 1982 to Present

By Rob Hanna

On Wednesday the Fed will conclude its policy meeting and announce any changes. This happens 8 times per year. I have long referred to these days as “Fed Days”. Fed Days have a long history of having a bullish tendency. This can be seen in the chart below, which shows Fed Day performance back to 1982.


Of course not all Fed Days are created equal. To learn more about Fed Days, and where the strongest edges lie, I’d encourage you to check out the collection of Fed Day studies here on the blog, or read The Quantifiable Edges Guide to Fed Days.

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Sentiment Snapshot: Quantitative Tightening Underappreciated?

By Callum Thomas

The latest results from the weekly surveys on Twitter showed equity investors are still torn between a bullish outlook on the fundamentals vs less than convincing technicals.  On the bond side, investors had a change in heart on the week as 10-year yields failed to convincingly break through the 3% mark.  Part of that failed move may be down to over-crowding on the short side, but as I outline below, investors may be under-appreciating the amount of quantitative tightening that has been done so far, and that which is in the pipeline… and of course the market impact of the coming full circle of the great monetary policy experiment.

The key takeaways from the stock + bond sentiment snapshot are:

-Equity investors remain torn; bullish on fundamentals, bearish on technicals.

-Bond investors had a change in heart on the week as the breakout through 3% seemed to fail.

-Traders remain heavily short treasuries, but as the charts show, the Fed has been steadily reducing its holdings.

-Quantitative Tightening may be still be underappreciated by the market in terms of scale and impact.

1. Fundamentals vs Technicals Sentiment: The latest weekly survey results showed fundamentals net-bullish sentiment off slightly, but still at pretty optimistic levels.  Technicals sentiment on the other hand went further bearish on the week.  As a reminder, the survey asks respondents to indicate whether they are bullish vs bearish for technical vs fundamental reasoning.  So it remains a picture of investors basically saying the fundamentals (e.g. economy and earnings) still look good, but the technicals (i.e. price action) is less than convincing.

Continue reading Sentiment Snapshot: Quantitative Tightening Underappreciated?

A Fiscal/Monetary Mole Stew


See this Bloomberg article for a look at the ingredients in a policy stew that looks like it was scraped off the floor of Worst Cooks in America. Click the headline for the article.

Federal Reserve policy makers seem to be working at cross purposes.

In laying out plans to ease some constraints imposed on banks after the financial crisis, the Fed is moving to free up tens of billions of dollars for financial institutions to lend to promote faster economic growth.

At the same time it is reducing its balance sheet and gradually raising interest rates to restrain credit creation and keep the economy in check.

So tell me, why are they speaking out of both sides of their orifice? Is it because of the need to keep an object in motion (in this case, a hyper-stimulated economy within a Keynesian debt-for-growth system) hurtling forward at an ever increasing pace? Why can’t we just have a quiet end and soft landing to the boom that began in 2009? Ha ha ha, you know the answer already.

Continue reading A Fiscal/Monetary Mole Stew

Still, They Get The Benefit of the Doubt Every Time

By Jeffrey Snider

[biiwii comment: umm hmm… ]

There’s a lot wrong with LIBOR, they say. Even if there is, this surely isn’t any better. The world sees them as the ideal technocrats, the best and brightest. They are, and have been, the Keystone Cops.

The Federal Reserve Bank of New York said Monday it had mistakenly included certain repo transactions in the settings for April 2 to April 12 for the new benchmark, which is known as the Secured Overnight Financing Rate, or SOFR. The bank investigated the readings after it received feedback from market participants about higher-than-expected volumes of repurchase-agreement deals underlying the SOFR rate.

How Fed Policy Risks Reducing Federal Revenues

By Taps Coogan

[biiwii comment: pleased to welcome our newest author]

One rarely discussed aspect of the Federal Reserve’s response to the 2008 financial crisis is how profitable it has been for the Federal Reserve itself and for the US federal government. As a result of its efforts to suppress interest rates in the wake of the financial crisis, the Fed amassed an enormous $4.5 trillion pile of interest bearing assets via its QE programs.

As a result of its new assets, the Fed collects tens of billions of dollars a year more in interest income than it did before 2008. As per its charter, the Fed uses this revenue to pay its roughly 22,000 employees, cover its various expenses (roughly $4.5 billion), and pay its shareholders a 6% annual dividend. Whatever is left over is paid to the US federal government. The Fed paid the US federal government $91.5 billion in 2017 alone, compared to an average of about $25 billion in the years proceeding 2008.

Continue reading How Fed Policy Risks Reducing Federal Revenues

Treasury Yield Curve (10Y-2Y) Flattens To Lowest BEFORE The Great Recession

By Anthony B. Sanders

As Commercial Real Estate Prices Fall to Lowest in Nearly Two Years (Fed Inferno!)

It’s NOT a wonderful day in the economic neighborhood.

The US Treasury yield curve (10Y-2Y) has just flattened to 45.6 basis points, the lowest since just before The Great Recession.


And Green Street Advisers is reporting that commercial real estate prices have fallen to the lowest level in nearly two years, thanks primarily to the retail inferno.


Burn, baby, burn! Fed inferno!