Former FX trader Richard Breslow is feeling generous on Thursday.
24 hours after eviscerating you for what he calls your “wild projections fueled by an irrelevant and dangerous tincture of moral outrage,” today’s missive is a bit tamer and plays on a theme Breslow’s been pushing for quite sometime. Namely that there’s a disconnect between what central banks are saying (or even – gasp – doing) and what markets expect them to do.
Thursday’s hawkish lean by the Norges Bank (more on that here) is the latest bit of evidence that Breslow thinks supports the idea that central banks are no longer willing to completely ignore the negative externalities of remaining in crisis mode a decade on from the actual crisis.
His full note is entitled “You Really Shouldn’t Make It Up As You Go Along,” which seems to suggest he doesn’t subscribe to the Bill O’Reilly theory of what you should do when you can’t seem to understand what’s going on…
Find the full note below from Breslow who definitely doesn’t think you should “do it live”…
You Really Shouldn’t Make It Up as You Go Along
Ranges have been mostly tight in the foreign exchange market encouraging options traders to further reinforce the boundaries. After all, it’s now officially summer and attention is wandering. Trade the range that the market allows and go home as early as possible. Except that’s really bad advice.
- One thing that has changed more and more over time is you just can’t predict when a move is going to happen. Summer doldrums, December somnolence are all true until they’re not. And increasingly less so. Day traders may schedule more holidays, but fund managers don’t and can’t reduce positions because it’s nice outside. One thing they know, far better than commentators, is you have to be in it to win it
- What makes this year even more interesting than most is that indecision isn’t being driven by our waiting on some financial crisis or election timeline, but by an extraordinary level of cognitive dissonance. The ability of people to string together utterly inconsistent arguments to describe what’s going on in markets, and the world for that matter, is staggering
- And most importantly, it makes, what are manifesting themselves as quiet markets, actually highly unstable. The global economy can’t be simultaneously growing well and picking up momentum while limping into recession. Nor can it be buy every dip in carry if we are increasingly risk averse
- And if there’s one question that needs to be addressed, it’s whether investors or monetary policy makers better understand what central bank reaction functions will be to both data and market setbacks. It can’t be ignored that with everyone stressing over the four-week caning of oil prices, the Norges Bank removed its easing bias today. In fact, look around the globe and tote up the preponderance of those surprising, hawkish or dovish, and you’ll see a pretty compelling picture
- And yet traders don’t buy it for a second. Something will have to give. It’s understandable that there’s been this impetus to flatten yield curves, but what happens if that global recession doesn’t come soon
- People forget that the Fed has two official mandates and a lot of discretionary leeway in addition. Poorly constructed measures of inflation don’t require them by some law to ignore labor market strength or other factors. They don’t have to be governed only by the lowest common denominator. Nor forever ignore the negative externalities of oppressively low global rates and how they further suppress yields and encourage profligate risk-taking
- Don’t spend your time zoning out. Use it to resolve some of these inconsistencies as you forecast and think about where asset prices will go