Sometime a few years ago, my best old high school buddy came to my work. After a couple of hours watching me trade, he said to me, “I don’t know how you do it.”
“Do what?” I asked.
“Make all these decisions without knowing all the facts” he responded.
“What do you mean? It’s not like I don’t have any information.”
“No, I get it. I just don’t know how you do it without having all the information. You make all these decisions based on 50%, or maybe even less, of the information you really should have” he explained.
“Ahhh… but if I wait for everything to be clear, the market will have already priced it in.”
“Yeah, I understand. I just couldn’t do it. You are always dealing with all these unknowns. At that level of uncertainty, we would avoid making decisions until it became more clear.”
The problem with Central Bankers
As a trader who is always anticipating, I can’t tell you the number of times I have mistakenly assumed Central Bankers see the same things as I do. But the problem is Central Banks have zero ability to act without the facts all lining up. They do not anticipate, but simply react, and often with a big lag.
This morning there are a bunch of market pundits making the argument that since financial markets have stabilized, the Federal Reserve can continue on their tightening course. I understand their point. It makes more sense for the Fed to be hawkish today than in January or February.
Let’s think back to the days after the Fed’s first rate hike last December 16th. At the time the Federal Reserve was stubbornly guiding higher even though it was the first rate hike since the 2008 credit crisis. Refusing to listen to the market, the Federal Reserve tightened financial conditions to the point where they ushered in a global slowdown. But they didn’t care because the “information” they were looking at all pointed to needing higher rates.
It didn’t matter that smart guys like Ray Dalio were warning about the potential problems with tightening too fast, the Federal Reserve “knew” what to do. “Zero was an emergency rate, and the emergency had long past” chants were heard emanating from the Fed’s boardroom.
It was obvious the world economy could not take the US tightening, but Fed officials continued guiding tighter for all of January and February. Doing so, made the problem way worse than it had to be.
And this is my point. Do not assume the Federal Reserve will take any sort of action until the facts are overwhelming obvious.
Although with the US dollar selling off and commodities rallying for the past month, it now makes more sense for the Federal Reserve to lean hawkish than it did at the start of the year when the opposite was happening, I doubt the Fed will switch so easily.
It might be obvious to you and I conditions are improving and the global economy is now more able to handle some hawkish lean from the Fed, don’t expect the same understanding at the Fed. They will be looking backwards, not forward.
They stayed on the brake way too long and created the January/February mess, and they will be loathe to make that mistake again.
Central Bankers are not like you and I. They need all the information to line up perfectly before they move. There is not yet nearly enough clarity for the Federal Reserve to return to their hawkish bias.
I have learned the hard way that assuming a Central Banker will see all the obvious signals will result in a change in policy. It doesn’t need to be “trader obvious”, but “regular person obvious.” And I don’t think we are anywhere near that point yet.
Yesterday I wrote about the sudden strange obsession with the Bank of Japan’s stock holdings. And although I was not smart enough to figure it out, one of my much more astute readers was kind enough to point me in the right direction. Have a look at this great tweet from Janney’s Chief Fixed Income Strategist Guy LeBas (@lebas_janney):
Once I saw Guy’s tweet I instantly knew he was right. The Bank of Japan planted all those stories so they could judge the reaction to potentially buying even more equities. You might call us overly cynical, but it makes perfect sense. I was already in the camp that the BoJ will over deliver at tonight’s meeting, but this sealed the deal for me.
Thanks for reading,