Ahhhhh…. You just have to laugh at Fed officials. Nothing else to do.
In hindsight, it is now obvious that when Bill Gross from Janus, Marc Kasriel from PIMCO and Mohamed El-Erian from Allianz all warned against counting a June Fed hike out, they were doing so after getting whispers in their ear. Unfortunately these illustrious bond managers didn’t hold enough sway to alter market expectations, so the Federal Reserve resorted to leaking information to the WSJ and other “think tanks.”
Now in a weird “told you so” moment, Fed officials are blaming the markets:
LACKER: MKTS TOOK WRONG SIGNAL FROM FED IN MARCH AND APRIL
Yeah… sure… Let’s think back to March 29th when Yellen gave a speech entitled “The Outlook, Uncertainty, and Monetary Policy.” I think Gluskin Scheff’s David Rosenberg summed it up best:
I have been in this business for 30 years and have never seen a central bank chief slip the word “uncertainty” into the headline.
Not just that, but she invoked the term no fewer than 10 times to describe the domestic and global macro and market backdrop — this even as we pass seven years since the worst point of the Great Recession and seven years into the most radical easing of monetary policy in recorded history.
Markets did not take the wrong signal from the Fed. The Fed gave the wrong signal.
I will leave it to others to debate the reasons for these colossal screw ups. Instead of over analyzing all the Fed’s missteps, let’s just figure out where we go from here.
Over the past couple of months, investors have flocked into bonds, eschewing stocks and preparing for the end of the world. Have a look at the last month’s ICI fund flows:
Capital has steadily been drained from equity funds and stuffed in bond funds. And we all know about the mad scramble into VIX related funds:
Although eventually I believe a big backup in the bond market will cause a stock market dislocation, that is still some time off.
The pain trade for this summer is for bonds to sell off and stocks to rally. Markets have a habit of going in directions least expected. It would be just like the Market Gods to squeeze the stock market higher through a big decline in bonds.
I am not buying US stocks as most other world stock markets offer better value, but I continue to be short US bonds. I am also short German bunds and Japanese JGBs. The next crisis will not start in the stock market. It won’t even originate in the high yield market. It will start when the sovereign bond markets realize these Central Banks have no clue what they are doing. This latest “all over the map” stunt by the Federal Reserve shows how truly lost they all are…
Thanks for reading,