It’s Friday and by this point in the week, former FX trader Richard Breslow is usually at wit’s end with your bullshit.
Today is no different.
See, Richard has been listening to everyone tell him how the Fed made a policy mistake by hiking into a deflationary backdrop and how the collapse of the yield curve presages imminent doom for the US economy and he’s heard all he cares to hear about that.
You, Breslow thinks, have become so infatuated with crisis-era policies, that you’re willing to throw caution to the wind in terms of the distortions those policies create if it means “keeping your carry trades alive.”
Well, enough is enough, goddammit. And so Breslow is going to send you off into the weekend the only way Breslow knows how: by berating you mercilessly.
- Frankly I just don’t see it. And would suggest you ignore that algorithm behind the curtain. Analysts have become so inured to crisis rates that they no longer understand their addictive and unhealthy nature. The negative externalities have become just the price we pay to keep our carry trades alive
- Well these small rate hikes aren’t going to be what does or doesn’t roll the economy over. Indeed, they have a better chance of moving inflation expectations higher than driving them lower, once balance sheet normalization starts and other central banks slow their buy-everything binge. Economies and markets are people too. There’s an enormous emotional factor in how they tick
- I’m going to say it, and don’t gasp, it’s precisely the right thing to be doing. And I’ll even scandalize you some more by saying, I found Chair Yellen’s description of the economy credible and her forecasts reasonable
- The same cranks that say inflation has been permanently suppressed by exogenous factors beyond the central bank’s control are also saying inflation hasn’t risen enough to reflect a healthy economy. They’ll hang on every sound bite from any global banker on the day’s docket that fits with whatever current storyline is playing. But tell us that the Fed has lost credibility in their not so humble opinion. The track record of market forecasters has been nothing to write home about but that doesn’t stop them from being absolutely sure this time
- There’s a lot more going on with the yield curve than a simplistic protest against the rate hike. There’s a good argument to be made that, at least initially, the balance sheet normalization could actually be a yield-curve flattener as the smaller reinvestment caps mean Treasury has less financing to make up, and could very conceivably do it with bills. Down before up may be the cleverer trade
- Meanwhile, other assets get their say, too. Stocks, in fact, didn’t collapse. They look just fine. The dollar is trading near the high of the week, but certainly not a threat to anything. Emerging market currencies are near their highs since the end of 2014. Hardly a sign that growth is about to be pitched off a cliff
- And just to add icing to the cake, Europe didn’t end up collapsing and is now everyone’s darling. Those headwinds may have swung around and are now pushing from behind. I know we’re supposed to be angry at everything, but for today, at least, markets are enjoying fair winds and following seas