Nomura’s McElligott On Yellen As Treasury Secretary, Year-End Outlook

Nomura’s McElligott On Yellen As Treasury Secretary, Year-End Outlook

For the better part of two months, Nomura’s Charlie McElligott has been keen to press the idea that barring a truly epochal shift in American politics accompanied by protracted, widespread social unrest, the market would have a difficult time “realizing” (and there’s a double entendre in there if you look hard enough) the kind of outcomes reflected in some pre-election hedges.

Equities, McElligott variously suggested, could be “slingshot” higher post-election absent a worst-case scenario, while vaccine readouts, pro-cyclical seasonality, and a latent, mechanical bid from vol-sensitive investor cohorts which would re-leverage on realized vol compression, could provide a tailwind into year-end. That’s one sequencing thesis.

There was some scope for things to get sloppy post-Op-Ex, but as Charlie wrote in a Tuesday note, vols are continuing to collapse, and at a speed “beyond anything I could have anticipated.” “Look at this destruction,” he marveled, referencing Monday. He described the vol selling in the front-end as “capitulatory.”  


Obviously, one catalyst on Monday afternoon (and into Tuesday) was news that Janet Yellen will be Joe Biden’s Treasury Secretary.

That’s bullish for all the usual reasons (e.g., fond memories of the low vol bubble she presided over, which unfortunately burst the very same day Jerome Powell was sworn in to replace her), but also a few new ones.

The assumption is that Yellen will work to ensure that the recovery from the pandemic is not hamstrung by a lackluster fiscal impulse. In the same vein, Yellen is expected to coordinate closely with Powell in just the kind of monetary-fiscal “partnerships” seen as necessary to bring about more robust, real economic outcomes that matter for Main Street (as opposed to the asset price inflation engendered by monetary policy working in isolation, as it did for most of the post-GFC era).

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McElligott emphasized all of that. “The announcement of Yellen as Biden’s Treasury Secretary effectively greenlights 1) ‘lower forever” policy support, 2) big fiscal advocacy, even though the magnitude of that is dependent on the Senate, and 3) quasi-debt monetization, as the Fed and Treasury evolve closer to one, like-minded entity.”

All of that is spot-on. And although Charlie doesn’t go this far, I will. There’s a sense in which Yellen and some of her former colleagues probably feel like she’s (still) the rightful Fed Chair. As Treasury Secretary at a time when the Fed and Treasury are poised to function as “one, like-minded entity” (to quote McElligott), I’d venture that Yellen will be de facto Fed Chair too. It is inconceivable to me that Treasury Secretary Yellen would be rebuffed by Fed Chair Powell in the event they disagreed on the proper course for policy — any policy.

Obviously, those “behind-closed-doors” dynamics will be much more airtight under Biden than they were during Trump’s leaky sieve, gossip factory.

As far as equities into year-end, McElligott reiterated that vol destruction “will continue to feed into an expected mechanical escalation of second-order vol-control re-leveraging in [the] coming weeks, as the position size is inversely proportional to the instrument’s vol.” Volatility is “your exposure toggle,” as Charlie loves to say.

Looking out through December, McElligott said “the feedback from clients is universally bullish into year-end, where any sort of corrective move would be a dip to buy.”


5 thoughts on “Nomura’s McElligott On Yellen As Treasury Secretary, Year-End Outlook

  1. Each economic scenario is a little different than it’s predecessors . I attribute that to man’s ingenuity to learn from the past and attempt to alter the future.. In relative safety along the sidelines one can sit and pontificate or ponder (take your pick on that choice)..
    We are at the climax of the current ” stew ” that has been cooked for an inevitable Culinary evaluation. Partially agreeing with H … on a lot of well reasoned musings here but I do think this turns out to be a Test of MMT which is in fact practice not theory.. I think it will be enlightening !!

  2. A quick google search of Yellen & Powell from January, 2018 shows plenty of pictures and articles evidencing the 2 of them functioning in a professional, courteous manner at the time of the handover to Powell.
    Even though she resigned from the Fed, you get the sense that they put the interests of the Federal Reserve and the country ahead of themselves at that time (January 2018). This bodes very well for a professional, productive working relationship between Janet & Mr. Continuity- if Powell is not replaced.

    1. Well, yeah. They worked together forever. That’s my point. This is like if you were the Chair of the economics department and you left for four years to go do something else, and then you came back and became Dean of Admissions or something. And now the guy who worked in the Econ department with you for decades is Chair of that department.

      What I’m trying to convey here (and what everyone is trying to convey to the public) is that speaking in terms of “continuity” in this situation is tautological. Of course there’s continuity. Like, it wouldn’t make any sense to say: “My wife and my dog went to Kroger for groceries and I expect that when they get back, we’ll all have a productive working relationship.”

      This whole thing (i.e., Trump replacing Yellen and trying to nominate Stephen Moore and Judy Shelton, and just all of this general insanity) never made any sense in the first place. There was no reason to promote Powell. It wasn’t a decision based on merit or anything that could have caused any internal consternation at the Fed. It was just Trump making a totally arbitrary decision because he had the power to do it. I don’t think a lot of people understand this aspect of the administration very well. He did things that, to a public which doesn’t follow these matters closely, sound rational because the public has no frame of reference. “Trump picks new Fed chair” was a headline that sounded totally normal to the average US citizen who knows nothing about the Fed. But to people who do know something about this, it was just flat-out goofy, like almost everything else he did. The people involved (in this case Powell and Yellen) knew it didn’t make any sense. So what you’re seeing now is just the restoration of normality.

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