It’ll be difficult to escape hawkish Fed interpretations over the next week or so.
Take former Lehman trader Mark Cudmore, for example. In a short commentary penned Thursday, he asked if the June FOMC was an epoch-making event.
His tone was indicative of the mood among some market observers, even as he claimed that “most strategists” see the dot plot shift as little more than “a short-term catalyst.”
“The Fed has just implicitly approved a slow but unstoppable return toward policy normalization,” he went on to declare.
The gist of his argument was that having trailed international peers in taking the first tentative steps down the road to policy normalization, it’ll be difficult for the Fed to reverse course.
“I can’t remember a single other moment in the past 20 years where much of the rest of the world had started changing their policy outlook en masse and leaving the Fed resolutely making a defiant last stand so isolated,” Cudmore wrote, adding that with the “master” having “belatedly” countenanced a global hawkish pivot, the Fed would lose credibly if it were to reverse course and indicate that, in fact, the Committee isn’t weak-kneed in the face of a few hot inflation prints.
Cudmore went on to say this could become self-fulfilling, as other central banks, having secured the Fed’s stamp of approval, will now “gain even more confidence in their own hawkish shifts.”
With all due respect to Mark (I’ve never spoken to him, but he seems like a nice, even jovial, individual), I’d suggest this is too much dramatization.
For one thing, it’s almost always a mistake to proclaim an epoch. That’s typically an exercise reserved for historians, whose occupation, socially useful as it may be, is the professional embodiment of hindsight being 20/20.
Cudmore is simultaneously aware and unaware of this. Investors, he correctly noted, are “terrible at contemporaneously identifying major long-term turning points.”
Experienced traders, like him, “learn early that there’s far better risk-reward in fading in-and-out of trades,” versus calling peaks in assets — and then leaping off those peaks in a blue leotard and red cape.
As for strategists, Cudmore said the best of the lot “tend to have a large and complex underlying framework,” which almost by definition means maintaining an aversion to placing too much weight on a single event, like a shift in the Fed’s dot plot.
Despite being acutely (and admittedly) aware of the futility inherent in efforts to preemptively declare the dawning of new age, Cudmore did just that Thursday.
Well, almost. The title of his piece was: “A Momentous Markets Turning Point? Fed Shift Has That Potential”
After more than a half-decade in the media business, Cudmore is one trader who’s apparently learned the most important rule of penning dramatized, hyperbolic financial content like that churned out by some of the portals which frequently copy/paste his daily musings: Always use a question mark.