Former FX trader Richard Breslow has been pretty keen on pushing the idea that traders and investors are ignoring an imminent change in central bankers’ resolve.
That was the subject of a post we ran last week called “Josephine Witt’s Reign Is Over Or, Central Banks May Actually Mean It This Time.” Here’s an excerpt:
But recently, you kinda get the impression they’re going to try and dig themselves out of this for real. Because it’s getting increasingly difficult to deny the market distortions they’re causing whether it’s absurd equity valuations, credit spreads that are increasingly detached from fundamentals, bonanzas for carry traders and vol sellers, etc.
As a reminder, here’s what they’re trying to dig out of:
That’s a pretty big hole.
But Breslow is convinced they’re going to give it a shot and he thinks anyone who isn’t willing to give them the benefit of the doubt is a “frog in water that is being boiled slowly.”
So while this morning’s dismal CPI and retail sales data in the US may give the Fed an excuse to make today’s expected hike more dovish than they were already planning on spinning it, Breslow wants you to know that the tide has turned. More below…
Ignore a Changed Rate Narrative at Your Own Risk
You have to listen very carefully to what people are saying in a world where traders hew with absolute certainty to the party narrative, yet believe in nothing. Can you remember any other time when conversations began with, “Do you have any clue why X, Y or Z is happening?” and end with, “I just bought some more and am looking to buy on a dip?”
- We used to reward traders who came up with clever insights into why moves were actually occurring or, better yet, about to happen. Now we settle for describing things after the fact, couched in assured inevitability, and going with the flow. The problem is that some stories, like some moves, are short term and others go on for ages. The Holy Grail is discerning when a short-term tale has a chance to be developed into a saga. Better yet, one with sequels
- Let’s stipulate that uncertainty is rife and there’s nothing we can do about it. Geopolitics is a confusing and confused business. But unlike in the past, it won’t be the convenient excuse for policy makers pushing to maintain their forward guidance of unending trickle-down economics. Believe it or not, we are moving away from that. Slowly and haltingly, to be sure, but you need to start internalizing that fact. And this has implications for the big-picture trends
- Ask anyone and you’ll hear they hate stocks and hate bonds – – and own oodles of both. Why not, it’s been the smart way to go. But now look at most central banks and you will see them trying desperately to gently push us toward accepting a less-accommodating environment. It’s everywhere, we just haven’t taken it to heart because traders are like frogs in water that is being boiled slowly
- We live and struggle with a world that is inextricably globalized. Despite what you are told, that isn’t going to change. Yields are low because everyone has been pushing them that way. As the rate environment evolves, expect the change to be contagious
- The central bank meetings this week will go one of two ways. Pushing the notion of rate hikes to come or assuring investors that we are getting there, but not yet. Don’t expect, “We have not yet begun to fight.” That ship has sailed. Which is why the comments from the Bank of Canada are well worth considering. The word has gone out. As Governor Stephen Poloz said, interest rates have been low to offset shocks and they have done their job. I know the world seems like it’s in crisis, but the global economy isn’t
- This is all worth considering because just as the Canadian dollar can go from chump to champ in a matter of days, so too, in reverse, can all those trades that seem so iron- clad. Their guardian angels are shedding feathers.