Former FX trader Richard Breslow is back at the desk and he’s mad at central bankers.
Of course we’re all mad at central bankers. Kind of. But kind of not. Because the belief that trillions in CB asset purchases will continue to serve as a vol-suppressing liquidity “supernova” (to quote BofAML) has made the low vol regime self-fulfilling. That, in turn, has created a veritable bonanza for carry traders and it’s also allowed everyone from E*trade-ing average Joe to (supposedly) sophisticated systematic strats to lever up and ride the wave.
After all, what’s the point in going against the grain? As Breslow puts it, “it’s contra-indicated for traders to keep putting themselves in a position to have their eyes ripped out.”
Read his full Monday missive below.
One of the, many, evil consequences of the current trading environment is that people aren’t really paying attention to what’s going on. What looks like hyper-sensitivity to every headline and news tidbit, is merely a manifestation of the sad truth that investors have realized there’s very little upside to believing in anything. Market narratives aren’t carefully crafted as new information deepens their texture. They change as if investors are wantonly playing with the remote control on the television set.
- And, of course, it only makes matters worse if risk appetite changes dramatically every Friday afternoon. No one has the fortitude to risk weekend misadventures from the various powers that be
- As a result of the poor track-record of central bank forecasting every forward-looking speech now comes with the obligatory data-dependent disclaimer. Monetary-policy rate setters feel the need to make sure we really know we live in an uncertain world. And then proceed to present seemingly precise quarter-by-quarter forecasts. Staying within their educational comfort zone with complete deniability
- We all know how people are conditioned to ignore boiler- plate. And this may have been all right when forward guidance was meant to buck us up and then ease quantitatively some more. But the ground is shifting. And this approach is becoming dangerous
- It’s contributing to the death of asset-price volatility. The very phenomenon that so many correctly warn about.
- It’s bad communication. They just seem to have a perpetual inability to make academic and practical applications sync
- Last week, the ECB’s Peter Praet extolled the benefits from “very low interest rates”. He went on to remind that “our monetary-policy decisions are only guided by our price- stability mandate.” Which, even if true, they haven’t met. But then went on to warn everyone to prepare for policy normalization. Just how are they supposed to do that? It’s contra-indicated for traders to keep putting themselves in a position to have their eyes ripped out
- Stay calm, we will be gentle, gradual and won’t upset the apple cart isn’t exactly a cri de guerre for bond vigilantes. And it’s not going to galvanize governments to all of a sudden embrace responsible behavior
- If central bankers hope that investors will start to exhibit sensible behavior, consistent with their fiduciary duties, they need to start speaking their minds. And if that causes markets to back up, so be it. No one believes they aren’t in complete thrall to financial conditions. They are going to have to prove it isn’t the case. So far there’s no indication they have the stomach for it
- This “you can’t handle the truth” condescension no longer serves any good purpose. It’s indicative of the belief that the worst thing that can happen is “I’m wrong”. No matter what else bad may have to happen to protect their egos. Why should investors do what their central bankers are afraid to?