Monthly Archives: April 2011


The street has taken a turn recently toward "flatter." Inflation indicators, PM and Fed zirp promises have left strategists conflicted but as the May Refunding approaches, we see a bull flattening bias forming. Radical agnostics when it comes to PD research, we are quietly cheering for a bearish-flatter tilt.

Since last November (Squawk Box guest host appearance), we have advocated a buy down/sell dear don't believe the hype approach to FI. With the 2 year scraping 60 and the 5 at 2%, I don't see much outright value. Thus, playing relative value becomes more popular and direction a subtext.

The effects of carrying strong currency are starting to bite on foreign shores. Liquidation of the massive communal dollar short around the Treasury supply would add to the fun. The Greeks could find themselves "bringing restructuring gifts" to Sec. Geithner Action in the EU would be a nice divergence from debt ceiling/deficit haggling.

Winter and Spring have seen a significant run in risk assets as domestic FI was pinned down under the Fed's spread compression forces. We get the sense that the sleeping giant - the bond market - wants to regain some of the spot light. All of "this", after all, is about debt. Not equity, currency, corn or dare I say it? silver.  Word to the wise, be careful how you wake the giant up.

Cat and Mouse

The commodity play ran up against something bigger than weather and The Bernank today.  The line at the door for reducing positions on the month got too crowded and smart money pushed through. Wheat, corn, soybean oil and cotton all saw heavy liquidation. The dollar should be watched for replacement bid tonight. Traders aren't dumb. A transparent Fed is finding itself in a monetary game of cat and mouse.

Meanwhile- Back on Earth

What we have observed lately is a large amount of heavy macro ranting in front of very simplistic and highly correlated trading. I'm not a big fan of the combination. Us data now shifts to ISM reports and roughly 170,000 in payrolls. After England enjoys a party celebrating its royal heritage, Europe will take over the news cycle. The situation is clearly coming to an inflection point.  I believe this will be the catalyst that throws the "big macro" clipboard out the window. Positions will dominate the trade and market volatility is driven by liquidation. I keep seeing George Costanza going for the door when smoke popped up in the kitchen. Result? The clown got trampled.



Did Fed Tip Its Hand? CNBC Net Net

Ben Bernanke
Mary Altaffer / AP
Federal Reserve Chairman Ben Bernanke.

With a subtle wave of his baton, the aspiring Maestro may have started the music for another round of Federal Reserve monetary easing.

Ben Bernanke, chairman of the US central bank and keeper of the keys to stock market money flows, oversaw a tweaking of wording in the Fed’s post-meeting statement that had trading floors buzzing.

The statement, which preceded the chairman’s first-ever news conference following a Fed Open Markets Committee meeting, simply stated that the group will “ regularly review the size and composition of its securities holdings in light of incoming information and is prepared to adjust those holdings as needed to best foster maximum employment and price stability.”

The change in wording was subtle, but for the market it was shorthand (or perhaps longhand, considering the chairman’s traditionally opaque language) that another round of quantitative easing—QE3 in market parlance—was on the way.

After all, the conditions remain ripe for more easing, at least according to the Fed's criteria. The central bank has lowered its growth estimates for gross domestic product and believes inflation levels are muted. So why not some more pump-priming?

In this case, though, it won’t involve the Fed printing more money to buy Treasurys and other debt, as in the first two versions of easing. Instead, it will simply sell the $1.365 trillion in accumulated toxic junk on its books and then use those proceeds to buy more government securities—in this case, likely a bit further out on the yield curve than the present shorter-dated targets.


The process was first outlined Monday in a note from David Rosenberg, economist and strategist at Gluskin Sheff.

“That's what QE3 looks like, and you just got the tip of the hat from the FOMC,” says Dave Lutz, managing director of trading at Stifel Nicolaus. “Ben's Q&A just got more interesting.”

If that’s the case, it lends more credence to the notion that Bernanke is aspiring to the “Maestro” title of his predecessor, Alan Greenspan, who earned the sobriquet by virtue of his gentle molding of the financial markets—until, of course, the whole thing exploded with the financial crisis of 2008 and 2009.

In fact, the hint was so deft that it left Bernanke enough wiggle room to keep the QE momentum going—the market has rallied 90 percent off the Fed’s programs—without actually having to go another round.

Instead, the chairman could use the whiff of easing just to keep the markets on the line for another rally.

“The Fed took the chance that they could do this policy and keep it rather amorphous—QE is whatever you think it is,” says Kevin Ferry, president of Cronus Futures Management in Chicago.

The easing did not, in fact, have the actual dollar impact that many think, Ferry contends. Rather, it was a psychological tool used to goose the markets.

So is this just another mind game from Maestro Jr., or an actual liquidity infusion?

“Anyone will go on TV and tell you there’s going to be a QE 3, but none of them understand what QE 1 or QE 2 is,” Ferry says. “If people want to believe this (is QE 3) then the Fed is uncomfortably going along with it.”

Q and A

Q: Mr. Chairman, why has the Fed engaged in this extraordinary monetary expansion?

A: Because the financial system was - and by many metrics remains - insolvent.

Q: Gold and silver are up dramatically since your programs have been executed. Does this worry you?

A: Yes, they are and no, they don't.

Q: Will there be further debt monetization?

A: Certainly not before the budget is passed and the TREND of deficits is addressed.

Q: If the economy has traction, what is the "exit" strategy?

A: We will be winging it.

Thank you, see you in 3 months.


We described the original emergency facility operations of the Fed as "monetary pornography." When QE was triggered, we compared the slide to switching from Playboy to Hustler. Once you enter the bizzaro-world of a Central Bank boosting inflation you have to realize that "success" will be measured by the CBs loss of credibility. The Fed bashers fail to recognize the changed metric. Since the August policy adjustment, the currency has fallen and inflation measures have moved up to roughly 2.7%.

It is this increase, and the now open expectation by market participants of further increase that the Fed will be addressing in the statement and press conference Wednesday. We are at the upper band of what most would say is tolerable and higher than other CBs deem acceptable. Bernanke, Yellen and Dudley form a triumvirate at the top of the Fed that believe these price increases are "transitory."

Here's how monetary pornography makes a Central Banker go blind. If  BYandD are right, then the policy doesn't work. If markets (and corporate CEOs) are right, then the Fed will have to restrain the expectations they worked so hard to elevate. The concept of the Fed "in neutrality" has been lost right when this important concept of equilibrium is needed most. The continuation of rolling purchases to hold the balance sheet stable (or face a soft "tightening") ended a neutral Fed.  The Chairman and the statement are thus the last "tools" (pun) in the toolbox to lay out the forecast and hope the markets buy in. Here is how I wish it would sound, " The policies of extreme monetary accommodation have boosted economic activity and both recognized and expected inflation readings. The Board continues to believe our gambit, ultimately, will not work."