Falling Up

One of my early mentors was John Eckstein, he started Eckstein and Co. which became Discount Corp and then ran Dean Witter Governments from the WTC. John was a legend in the T Bill arbitrage space and "invented" the Year Bill contract. He passed away last year but left many grizzled Treasury Futures traders in his wake. I credit John with coining the phrase in markets, "falling up."
As arbitrary levels of various equity indexes are crossed, we continually hear the "if not for the Fed, the market would not be here" caveat. To us, this is the most vapid and unenlightening comment of the quantitative regime. I do not recall an abundance of "The market's only crawling sideways because of Volcker's quantitative tightening" in the early 80's. Our view, since 2008, has been a CB should embrace quantitative measures in inflationary/deflationary tails and rates targeting in the belly. And now, the difficult question: What metrics should alert policy makers that we have returned to the fat middle?
The ST Louis Fed (Dan Thornton white paper) explored this switch in 2004/2005. By close review of the minutes, the Fed deemphasized M1 and moved to a "borrowed reserve operating procedure" in Oct 1982. In the months that followed, with NO transparent and well advertised announcement, Fed Funds became the target metric. It was not until the Greenspan response to the 1987 crash that explicit targeting was universally accepted by market participants (nearly 5 years after the Fed's official change).
So, as both Bulls and Bears tilt heads skyward and watch gap-jawed the equity fall up- How will the regime change? The CB infatuation with the policy myth of "Stability" and volatility repressing "transparency" are trapping the Fed in the QE Regime. Tapering is the "Let them eat cake" trial balloon of a regime that has over stayed its time. "Emergency measures" have morphed into common practice. Casual observers like to ask, "Where would the 10 year (or Bond) be if the Fed wasn't buying it?" A much better question would be, "Where would the Funds Rate be if markets could set it?" We believe, for the first time in years, that rate is now "higher."

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  1. Pingback: Falling Up by Kevin Ferry | MarketHEIST

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