The final chord in the famous Beatles song “Day in the Life” lasts 53 seconds. The Beatles’ producer George Martin had every spare piano in the Abbey Road studios hauled into the Beatles’ studio where all four of them, along with roadie Mal Evans, played the same E-major chord as engineer Geoff Emerick turned up the faders to catch every last trace. In 1967 this was how you went about creating a minute long fade out of a single chord. By the end, the recording instrument had been turned up so high you could hear Ringo’s shoe squeak (of course it was Ringo that ruined it!).
Now some of you are wondering why these minute details are even known (while other younger readers are wondering who were the Beatles and what exactly is a Ringo?). And although I am a big Beatles fan, even I have to admit listening for Ringo’s shoe squeak in the final sequence of “Day in the Life” is not something for everyone.
In trading it is easy to fall into the roll of Beatles aficionado, listening for tiny imperfections. Sometimes the imperfections are innocuous, like Ringo’s squeak, while other times your perceived detections take on a mind of their own, like the theory about Paul being dead because he was out of step and barefoot on the Abbey Road album cover.
Yesterday was one of those days where rumours moved the markets more than usual. There were boatloads of whisperings about the Fed having quietly met with several connected participants, giving guidance that the market had misinterpreted Yellen’s remarks from the previous day.
The US Two year yield had plummeted on the FOMC meeting, but yesterday as the rumours flew, the yield retraced more than half of the move.
These rumours had an even bigger effect on the US dollar.
Almost the entire move was retraced! For the US dollar it’s almost like the FOMC meeting didn’t happen.
I don’t know about you, but I am pretty sure that Paul McCartney did not die and get replaced by a look-a-like. And although I can’t be sure, I highly doubt that Yellen did such a poor job communicating with the FOMC statement and subsequent press conference that the Fed rushed out to have one on one meetings with connected market participants in an attempt to change market interpretations. If there really was a miscommunication, she would have given an off the record interview to the WSJ’s Hilsenrath to fix it.
Do I think there might be disappointed Federal Reserve hawks that might be giving private signals that the market should be careful assuming the FOMC is unanimously dovish? For sure.
But there is no way that Yellen had a press conference where she was grilled for an hour by reporters, and then privately gave different guidance to large market players.
This is a case where the market is not listening to what the Fed is saying. There is no need to second guess the FOMC statement and Yellen’s message from the press conference.
It is easy to understand why market participants are reluctant to believe that things have changed. After all, the narrative of the Fed raising rates has resulted in one of the greatest bull markets in US dollars of all time.
This trend has been steady, relentless and easy. All you needed to do was buy US dollars and forget about it. The worse that happened was that it took a week or two before the position was profitable. There has been barely a dip.
Of course, this trend has attracted speculators. My home made aggregator of US dollar position size of speculators in CME Currency futures is still at the highs.
Hedge funds and other specs are still sitting with nearly all time high position sizes in US dollar longs.
This trend is not going to be easy to break. It has worked for a long time.
But one thing I have learned is when volatility increases, it is time to head for the exit. If you think about how markets top, they don’t just quietly roll over. More often than not there are increasingly manic moves up and down, and then as they are gyrating around, all of a sudden they make a sharp move down.
The increase in volatility is a sign we are about to experience at the very least, a correction in the US dollar move.
I think yesterday’s rumours are giving us a wonderful opportunity to take short positions in the US dollar. The Fed is on hold until inflation reaches 2 percent. I know the market doesn’t want to believe that, but there is no sense second guessing what the FOMC writes out in black and white. The Federal Reserve Board is a government committee – above all else, they don’t want to make a mistake. Given all the worries about deflation and the potential for a 1937 style monetary policy error, the FOMC committee is going to err on being too easy, not the other way round. Up until now the speculators have had an easy ride assuming that the Fed will raise rates while everyone else was lowering them. It made the US dollar an easy one way bet. But the Fed has just told you it isn’t quite as one way as the market believes.
I am going to pick away at some US dollar shorts against the beaten up commodities currencies like Australia or Canada. If I am correct about the Fed being on hold indefinitely, it might even give a bid to the much maligned commodity sector.
Given the high degree of correlation between gold and the US dollar, it also make sense to take some long exposure to the precious yellow fella down here. One of my colleagues remarked that it felt like the market had forgotten that gold even exists. I agree. Even the bears barely take time out to make fun of it anymore. Bear markets often don’t end with some climatic puke, but in a boring state of general apathy. Maybe this is the best thing we could ask for…
Here is an idea for a precious metals long
If you are looking for different ways to play a potential precious metals bounce, I suggest maybe having a look at Silver Wheaton. SLW is a silver and gold streaming company that recently plugged our Bay Street dealer friends with a $800 million US dollar bought deal at $20.55 USD per share. The issue didn’t sell very well, and the syndicate puked out the position right before the FOMC meeting at $18.30 USD per share.
Although we have now bounced over a dollar from the clean up, I still think it is cheap. I am a big believer that the streaming companies are going to be best able to take advantage of the distressed nature of the precious metal equity market. I think SLW is worth a shot on the long side.
Thanks for reading and have a great wk-end,