We lit up the twittersphere on Friday with the pictorial help of @IvantheK and a comment that the Fed was engaged in an all out PR blitz to convince you they had assembled the exit policy A Team. Pedigree firms with big name economists continue to focus on the insignificant idea of "tapering." We are concentrating on a much more general theme, the Yellen Fed will end the era of Central Bank intermediation in security pricing.
Obviously worried about going where no meddling central banker has gone before, Stan Fischer has been enlisted to play B.A. Baracus to Janet Yellen's Hannibal. The initial plan has been to distinguish between a quantitative and a rate regime. Participants have been asked to write "Tapering is not tightening"on the blackboard 100 times. Contingent with this belief is the concept of Forward Guidance. FG is a central banker's white lie about the future. Unfortunately for them, we invented back month Eurodollars in the 80's, long before the Fed's crisis toolbox got super-sized.
Last week, for the first time ever, Green Eurodollar (3rd year-the strips are color coded) open interest exceeded White (1st year). In other words, FG has already been adjusted for in participant behavior. Thus, the Fed can only confirm the future forward term structure implied by the strip, or express their displeasure with it. The numbers shouldn't be feared just yet. Roughly 1% for the end of 2015 and 1.5% by mid-16. Volume is exploding and Put options are routinely lifted in 5 and 10 thousand blocks. The official jawboning has created a dangerous playground out where only quants and nerds used to hang. I've seen an awful lot of brilliant traders get bitch slapped by Mr. Market out there over the years.
I'm glad the A Team is forming. I think their qualifications are stellar. We're going to need them someday down the road because the one thing you can count on when the A Team is involved...something is going to blow up.