Former trader and current man who gave up on you knowing how to trade years ago, Richard Breslow, is out on Wednesday with a pretty good piece that touches – knowingly or not – on some concepts Deutsche Bank’s Aleksandar Kocic has explored at length: the idea of a noisy status quo, and beyond that, the notion that central bank transparency has made it impossible for anyone to form a long-term view.
As a reminder, here’s Kocic on the noisy status quo:
As transparency became the word of the decade, by its very nature it created the forces that push everything to the surface. Things exist thanks only to the attention they produce. There is no room for ambiguity. Although shocks (political and other) keep arriving in the market, they seem to be appearing at what looks like predictable time intervals (usually, on Fridays). Practically every week, there is a new issue that eclipses the previous one, and we lose interest in past issues, before there is any semblance of resolution. But shocks, if they are predictable, lose their spell and gradually become facts of life. Predictable political shocks feed back into their source. Due to their antagonistic character, they gradually erode the ability to make consensus and reduce the ability to legislate, making further reforms at least questionable, if not highly unlikely. The market “euphoria” (aka the Trump trade) that followed immediately after the elections is being perceived as increasingly remote. Despite all the promises of reflation of the economy, fiscal stimulus, expectation of economic turnaround, no change is on the horizon. We are stuck with the status quo, albeit a noisy one.
With regard to radical transparency (not the Ray Dalio kind), it transforms policy into a referendum. There are no clearly identifiable anchors. The goal posts aren’t fixed. Or, as Kocic puts it, there’s an absence of “rigid reference point[s], like a well specified reaction function, objectives, and triggers.”
So this is just a kind of rolling plebiscite. Clearly, that creates substantial risks in terms of encouraging mass myopia. Thanks to near-daily speeches and media appearances by Fed officials, this is quite literally a real-time information exchange between markets and policymakers. No one can see outside of this information exchange and if you’re a trader, there’s really no utility in trying.
In this way, transparency introduces risk in a paradoxical way. As Kocic writes, “transparency as a way of stabilizing the markets has become a tool of suboptimal control, one that reinforces the future risk in order to diffuse it — it is a tactics of delaying, rather than reducing risk.”
Hopefully, you’ll see the connection between all of that and Breslow’s latest, which can be found below.
But there’s one caveat. The title of Breslow’s piece is “from little volatilities, great trends will grow.” If you read all of the above correctly, you know that is in fact not likely to be the case…
It’s a toss-up when looking at markets to wonder whether the better analogy is the duck looking completely placid above water while its little feet are scrambling like crazy below the surface or a patient lying on the psychiatrist’s couch moaning of just being too conflicted to make life’s tough decisions. They’re both true, even if they seem, well, conflicted.
- Whether you look at generalized measures of volatility in equities, bonds or currencies they all remain in the sewer. Currency volatility, that last great hope of finding an asset whose prices are moved by news, has fallen back to three-month lows. It’s undeniably true, despite the shocking amount of event risk out there. It will also eventually breed trends that will sneak up on you
- At the moment, trader confidence levels are even lower than the asset volatility measures. Too many trades just aren’t working or don’t work long enough to warrant becoming invested in. And it’s forcing everyone to behave like day traders even as they navigate issues that are not at all suited to such short-term treatment
- As a result, we have fallen into the trap of mixing big, long-term issues with the general noise of a typical work-day. It may be possible to jump on some insignificant miss or beat for a quick basis point or two, but that’s no way to respond to the issues that will decide, in a broader sense, where all of this is going. And the problem is that it is those big issues where the greatest hesitancy lies
- Is there still a central bank put, despite all the central bank noodging about investor complacency? Obviously, this is a huge question, vexing commentators into apoplexy. The answer is, almost certainly, that for now, yes. But we won’t know its future until it becomes clear who the next heads of the Fed and ECB will be. Too soon to trade intelligently, too big a deal to ignore
- For my money, the debates around the next ECB President will end up swamping in importance the discussion of whether Cohn or Taylor would take radically different paths. They won’t. But the options and policy horse-trading that will go into the European debate will very likely end up deciding whether the euro is the buy or sell that could make a career
- And the central bank questions are only one set among a whole host of other issues, including the geopolitical ones. Something is going to happen and no one knows what. But even with all of this paralyzing uncertainty, moods do swing and markets test directions of least resistance. And they can take on a life of their own. Which is why I would urge you to take a look at your dollar and sovereign yield charts. They just might be telling you where the next potential lies. Hint: I think they do. And at this time of year, sometimes patrols become sorties, leading to a reconnaissance-in-force to a full-on trend. So don’t lose hope just because people don’t want to be decayed out of the game before the kick-off