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!


Fed is Behind, But Still Screwing Up

By Tom McClellan

Fed Funds vs. 2-Year T-Note Yield
April 13, 2018

Make me Emperor for a day, and I would compel the FOMC to outsource interest rate policy to the bond market.  Why should we pay 12 experts, most with expensive Ivy League PhD degrees, to do what the bond market can do far more efficiently (and cheaply)?

This week’s chart compares the 2-year T-Note yield to the stated Fed Funds target rate.  The FOMC has actually said that the target rate is 1.5% to 1.75%, so I’m splitting the difference by calling it 1.625%.  What this chart shows is that first, the two interest rates are very strongly correlated over time, which is as one would expect.  But second and more importantly, the 2-year yield knows best what the Fed should do.  And the Fed screws up when it does not listen.

If the FOMC would just set the Fed Funds target to within a quarter point of wherever the 2-year T-Note yield is, we would have fewer and quieter bubbles, and also much less severe economic downturns.  For whatever reason, the FOMC members have not learned this lesson.  None of them, as far as I know, is a subscriber, which is their loss.

Continue reading Fed is Behind, But Still Screwing Up

Jerome Is The New Janet

By David Stockman

Tie, Trousers And Same Old Keynesian Jabberwocky

The election of 2016 was supposed to be the most disruptive break with the status quo in modern history, if ever. On the single most important decision of his tenure, however, the Donald has lined-up check-by-jowl with Barry and Dubya, too.

That is to say, Trump’s new Fed chairman, Jerome Powell, amounts to Janet Yellen in trousers and tie. In fact, you can make it a three-part composite by adding Bernanke with a full head of hair and Greenspan sans the mumble.

The overarching point here is that the great problems plaguing American society—scarcity of good jobs, punk GDP growth, faltering productivity, raging wealth mal-distribution, massive indebtedness, egregious speculative bubbles, fiscally incontinent government—-are overwhelmingly caused by our rogue central bank. They are the fetid fruits of massive and sustained financial repression and falsification of the most import prices in all of capitalism—–the prices of money, debt, equities and other financial assets.

Moreover, the worst of it is that the Fed is overwhelmingly the province of an unelected politburo that rules by the lights of its own Keynesian groupthink and by the hypnotic power of its Big Lie. So powerful is the latter that American democracy has meekly seconded vast, open-ended power to dominate the financial markets, and therefore the warp and woof of the nation’s $19 trillion economy, to a tiny priesthood possessing neither of the usual instruments of rule.

Continue reading Jerome Is The New Janet

Milking the Savers

By Keith Weiner

Do you want to lend your hard-earned money to the US government? In exchange for the high, high interest rate of 2.8%? It’s a most generous deal, even though the Federal Reserve is committed to dollar devaluation at the rate of 2% per annum. So you are getting 0.8% per year, assuming that the Fed hits its goal. In exchange for lending to a profligate and counterfeit borrower—the government has neither the means nor intent to repay.

No, you don’t? This sounds like a bad deal? Well, tough.

It sucks, but if you need to hold a cash balance, your other choices suck more. Instead of lending to the government, you could deposit the cash in a bank. There’s only one problem. The bank will lend to the government. After taking out the costs of compliance, this rate is 2% according to the St Louis Fed.

This is actually up from 0.13% over the last three years, in our current bout of risinginterestrate-itis. Enjoy this high rate while you can.

In any case, the bank adds risk. On top of all of the risks you incur by lending to the government, you take the risk of bank insolvency too. The government does provide deposit insurance—but this is the same government whose risk you are trying to avoid by not buying its bonds.

Finally, you could hold paper cash, $20 bills. Ignoring the risk of theft, there is still a problem with this. You are lending to the Fed. The Fed issues dollars, which are its liability, to fund its purchase of Treasury bonds. The dollar is backed by government bonds.

To have a dollar is not to own a thing. It is a credit relationship. Someone else owes you. If you own the dollar bill, the Fed owes you.

Continue reading Milking the Savers

The Fed: Leaving the Sweet Spot

By Callum Thomas

One thing I am fond of is creating my own indicators, and today’s chart features one of my many favorites – the Fed Sweet Spot Indicator.  As the Fed is pressing on with monetary policy tightening, and as heightened volatility permeates the markets, it’s a great opportunity to revisit this indicator and what it is telling us about monetary policy and the market.

The chart in this article came from a broader discussion on monetary policy and markets in a recent edition of the Weekly Macro Themes.

As I mentioned, the chart shows the so-called Fed Sweet Spot Indicator vs the S&P500.

Continue reading The Fed: Leaving the Sweet Spot

Powell Don’t Talk Much Like Yellen…

By Heisenberg

Jury Still Out On Whether That’s Good Or Bad

Ok so in sum, on the Fed: three hikes (total) projected in 2018, a steeper trajectory in 2019 and 2020, upward revisions to growth this year and next, lower unemployment trajectory across the board, and a modest inflation overshoot on core next year and on headline and core in 2020.

Here’s what Neil Dutta, head of U.S. economics at Renaissance Macro Research had to say:

So, next year, the median FOMC official sees a slight overshoot on inflation (+0.1ppt) another 0.3ppt drop in the unemployment rate and just one more rate hike. That’s somewhat less than you’d expect in a standard Taylor Rule type model. That is not really hawkish, in my view. Buy stocks. Buy front end.

Inline with what I was suggesting earlier, the statement was kind of lukewarm on growth, describing economic activity as rising at a “moderate” rate, while describing job gains “strong” – that’s as opposed to the “rising at a solid rate” language and the less exuberant take comes courtesy of household spending and business fixed investment having “moderated”.

Continue reading Powell Don’t Talk Much Like Yellen…

Fed Comes A Little Bit Closer To Taylor Rule…

By Anthony B. Sanders

Raises Target Rate To 1.75% While TR Rudebusch Calls For 6.62% — Only 447 Basis Points To Go!

Yes, Jay (Powell) and the Americans (FOMC) came a little bit closer to The Taylor Rule (Rudebusch Model) with the FOMC voting to increase their target rate to 1.75%. The lower bound is now 1.50%.


The Taylor Rule (Rudebusch Model) calls for a Fed Funds Target rate of 6.62%. Only 447 basis points left to go, Jay!

Continue reading Fed Comes A Little Bit Closer To Taylor Rule…