In hockey there is an expression that Canadians love to use for a particularly bad stretch of play. It often comes at the end of a shift when the defending team is tired and hasn’t been able to make a change for fresh players. The offensive team controls the puck while the defensive team makes more and more errors. The errors feed on themselves. When one defensive player is beat, his teammate coming to help him only opens up another offensive player, who quickly gets the puck, and the cycle repeats with the defensive team increasingly skating around more and more frantically. You will often hear Canadians refer to this in the following manner:
“It was a gong show out there.”
This expression has become so ingrained in the Canadian hockey community that it inspired a whole line of clothing.
The past week as the various Fed officials have made all sorts of comments, I can only describe it as – “a complete and utter %$#&’ng gong show.”
At one moment you have James Bullard telling the markets:
“In my mind, the markets are making a mistake. I have been concerned that the market path of interest rates is lagging behind what the committee is thinking.”
Then you have Charlie Evans saying:
“History has not looked kindly on attempts to prematurely remove monetary accommodation from economies that are in or near a liquidity trap,”
The markets are rightfully confused about the path of monetary policy as there are many different messages coming out the Fed. Are they, or aren’t they going to delay tightening due to the US dollar strength and the global economic slowdown?
Their one day it’s on, the next day it’s off messages is worrying investors. In terms of risk assets, this is causing a sell now and ask questions later mentality.
And this had fed upon itself. Over the past few days as the stock market swoon has continued, the market has concluded that the Fed is definitely going to delay tightening.
Have a look at the decline in the Fed Fund futures forward curve over the past week:
During the past six months the Fed had been so diligently walking expectations higher. They were doing a good job at preparing the markets for the move off the emergency low rate of zero. Now in the space of a week they have completely abandoned the prospect of higher rates anytime soon.
I have long argued that the Fed was going to be slow in raising rates, but the speed at which they panicked has alarmed even me. During the past couple of days as the financial markets have come under increasing stress, most Fed officials have steered rate hiking expectations out further in time.
This is going to prove extremely problematic if they are wrong about how much the US dollar strength and the global economic slowdown affects the American economy. I get it that the world economy looks like crap. Don’t misunderstand me – I understand the problems in Europe and China. But I think the US economy still might surprise to the upside. If that is the case, then this week’s panicking by the Fed is going to cause even more pain in the bond market. The markets don’t need this seesawing back and forth in regard to the timing of the rate hike. The Fed had almost successfully prepared the markets for a lift off this summer. Now they have once again pushed it further out in time. The Fed is merely introducing more volatility with their wishy washy policies.
If there is anything to be learned from the past couple of weeks it’s that the Fed doesn’t have a clue what they are doing. The stupid dots that the market has been fretting about don’t mean squat as this Fed has absolutely no tolerance for pain of any sort. This is all sowing the seeds for the day when the Fed loses control of the bond market. But that’s a story for another day.
Getting caught up
I am getting caught up from the Canadian Thanksgiving long week-end so I am running behind. I was pretty negative on risk assets last week and that proved fortuitous.
However from a sentiment point of view, this morning I notice a lot of negativity. Posts about 1987 and 1929 are filling my twitter stream.
I have gone more neutral this morning. We are deeply oversold and due for a bounce.
I am long term bearish, but ready for a tradeable rally. I was lucky enough to have bought some S&P 500 puts last week and with VIX pushing 24 yesterday, the time to head to the sidelines is upon us. If this is the big one, then it is going to happen with me being in a more neutral stance.