Former FX Trader Richard Breslow is on a wicked roll this week.
Having lambasted traders for their unwillingness to empathize with the victims of the Manchester bombing, and having sarcastically (but kinda not sarcastically) told you to buy bonds and hope you lose money in order to hedge that giant equity position you invariably “hate,” Breslow is out on Thursday indicting what he says was a gross mischaracterization of the May Fed minutes.
The problem, Breslow says, is that markets, having been conditioned to interpret every ostensibly hawkish lean as a vacuous bluff, are simply hearing what they want to hear from central banks. And what they want to hear is “MOAR” – “more” accommodation, that is.
Obviously, that tendency could very well end up creating a situation where traders suspend disbelief until after the fact, at which point reality will suddenly wash over everyone in a nauseating Wile E. Coyote moment.
Breslow’s full note is below.
“Markets are never wrong” is indisputably correct from a day trader’s perspective. The only thing that matters is getting it right about whatever the next price lurch is going to be. People want to know where the orders and stops are. Which way the market’s leaning for the algorithms to attack. From this vantage point, we get all sorts of trading rules that boil down to stressing technical and risk discipline over any notion that understanding the fundamentals is relevant. And, of course, this has fully ingrained into our psyches that “it’s better to be lucky than smart.”
- Looking at it this way, the Fed was dovish in their minutes yesterday. After all, the dollar got hit, bonds jumped, equities leapt. How could you read it any other way?
- The only problem is, they weren’t. And while the market did a good job of torturing the marginal position holders, it’s a big mistake to make investing decisions based on that mischaracterization
- Central bankers have moved away from a position of wanting investors to respond to their actions rather than their words. In the past, they tried to be upbeat and optimistic with the tacit understanding that policy would remain in full dovish mode. Icing for the masses and sustenance for the trickle downers
- They are now trying desperately to get the message out that the world really is changing. To nudge investors toward accepting the coming regime change. But the people who matter, those that should and have a duty to care about and position for fundamentals, aren’t paying attention
- It’s going to take a much blunter communication approach than they’ve showed the gumption to muster. From experience investors know only too well that hawkish talk has repeatedly turned into hapless bluff at the first sign of asset price distress, the real economy notwithstanding. This is all a potentially huge problem for when inflation, especially wage inflation, eventually makes an appearance
- A lot of ink has been wasted with reminders of the 1994 market meltdown. Central bankers, we’re told, are going to have to be hyper-careful to avoid a recurrence. That’s an utter misunderstanding of what happened and taking away the worst possible lesson from the event
- The errors weren’t policy mistakes from the Fed or BOE, but from investment banks-turned-hedge funds that refused to listen to what they were being told and fought the tightening cycle every step of the way. The biggest losses didn’t even occur when the policy reversal commenced. They were much later in the year when lessons were only learned as certain firms were looking into the abyss of insolvency
- Of course the one message that was internalized forthwith was this is a much better game to play with shareholder, rather than partnership, money at stake
- This is one of those rare times when the nuance they think they’ve perfected should be shelved. The market needs a little preemptive blunt-force trauma. It’s not only central bank balance sheets that will need to be normalized. And it can’t happen with everyone heading for the exits at the same time