How (Not) To Trade The Fed Chair Edition Of The Apprentice

Ok, so the Fed Chair debate. Turns out it’s important. Who knew, right?

But just because it’s important and just because it will invariably shape markets for decades to come doesn’t mean there’s much to be had in terms of short-term trading profits from trying to handicap it.

Last week’s hawkish Warsh mania gave way to a Tuesday evening bout of dovish Powell trading when Trump’s “shortlist” leaked.

To be sure, there’s every reason to think through the implications of a Warsh-led Eccles cabal. We’ve been over that and over that. Bringing in someone who, if he sticks to his own script, would be keen on breaking the communication loop with markets, risks triggering a nasty unwind in risk assets as nearly a decade of conditioning goes out the window and investors are left in the dark about Fed policy.

So that can’t be ignored. And really, you can’t expect market participants to sit idly by and not speculate, which is why multiple desks have put out their own “guides” to the “contestants” over the past week. Here’s a fun table from Deutsche for instance:

And here’s BofAML’s version:

So that’s the backdrop for Richard Breslow’s latest column, out this morning. Read below as Richard reminds you that trading this is “a fool’s errand”…

Via Bloomberg

In a world seemingly dominated by central banks, it isn’t a surprise that we’ve all become fixated on just who might be the next Chair of the Federal Reserve. A person that remains — no matter whoever else briefly captures the spotlight — primus inter pares among those calling the global economic shots. We now have the supposed shortlist of candidates, and the office pools are overflowing with singles. The parlor game being played now is to explain just how markets would react to any announcement and exactly how each candidate would handle the job. Take it all with a large grain of salt.

• No one knows how a Fed Chair will ultimately respond to the challenges they will face. Their previous speeches are yesterday’s news. And traders have a poor track record, at best, of forecasting just what to expect. We take for granted that Alan Greenspan was a logical and predictable candidate to succeed Paul Volcker, yet little of what was expected, let alone the initial market reaction, turned out to be even remotely definitive
• Just like now, analysts couldn’t decide whether Greenspan would be a dove or a hawk. A believer in growth at any cost or an inflation watchdog. Very sensible and plausible arguments were laid out for each case. Would he be able to mold the board to follow his vision. Was he a technocrat or a decision-maker. Did he have the ability to deal with crises, could he possibly be independent since he had been an architect of many economic policies? And on and on. And it’s not as if Greenspan was an unknown quantity bereft of a large body of written and spoken opinions. He was well-known in foreign financial centers. And the timing of Volcker’s resignation was more or less known, just as is the current timetable for some announcement
• And do you know what the reaction was to the news that the man who would be, rather unfortunately and prematurely, hailed as the greatest central banker of all time? Markets got pummeled. The dollar flash crashed. Long bonds got crushed, equities tanked and gold soared. The Fed and Buba had to intervene and in France they told the banks to stop trading
• By the end of the day, asset prices stabilized and were all higher at week’s end. It was obvious after all because we were hastily assured that the two men were so simpatico that nothing would change. He was the continuity candidate. Ironic, as we have spent a ton of time in the last decade parsing just how utterly different the two men were
• Every candidate for the post has been type-cast and their potential tenures dissected. It’s a fool’s exercise. And you won’t get rich off of it. Then, as now, politics intervened incessantly. Global headwinds? Volcker had Mexico almost go bankrupt with a big push from his rate hikes and Greenspan was forever changed by the calamities taking place all over the globe
• Earlier this week, out-going Fed Vice Chairman Stanley Fischer said on Bloomberg TV that to be successful a central bank head has to have the ability to change course drastically when the facts change. Looking for someone with an open mind may be the best we should hope for and not fixate on what we think they are destined to do. Something to think about when we embark on the great tapering