Monthly Archives: May 2016

Enter Sandman

Despite historic dislocations in developed economy term structures and sub-par to average growth rates, the Fed seems poised to adjust the baseline funding rate on the financial system. If the rate was an indicator of the calibration of monetary policy, then perhaps all the media discussion would be warranted. Over the last 6 months, since the first adjustment, markets and economic activity have not cratered as many predicted.

Our model would set the O/N rate around 70bp under present conditions, nearly double the prevailing 37. This common widening -and INCREASED accommodation -at this stage of the credit cycle has supported the expansion A host of geeky rates with exotic names will need to adjust behind the Fed's publicized move (should they pull the trigger). Unfortunately, because quantitative monetary policy is still the true measurement (not rate targeting), extremely tight yield relationships beyond 1 year could usher in trouble.

Eurodollar pack spreads typically over 150bp have compressed to new cycle lows. EDU17-EDU18 is a flat-lining 23bp. That's a level consistent with TV ER doctors yelling, "Clear !" Quantitative Easing is an HG Wells time machine for policy. It helps a system jump past deep disruption in the short term and screws up future history. Those kinks and folds are now apparent out on the forward curve. Attempts to adjust in either direction - narrower and they invert, wider and they cause liquidation - will cause consequential reactions.

"Sleep with one eye open - grip your pillow tight."

Parts Known

Anthony Bourdain has finally found a proper home for his muse with the  "Parts Unkown" series on CNN. The CHICAGO edition is not to be missed and I've watched it multiple times already. The connecting of people, neighborhoods and legend through alchohol and food has never been more educational.

The glaring ommission of the Chicago episode is the Pits. Long gone from significance, they were once the Petri Dishes of Chicago's finest, strangest, brightest and most twisted minds. Whether eating chicken fried steak at Riccobeni's with Steve Albini or drinking at 2:30pm at Old Towne Ale House, the episode's missing "jag-offs" were the Merc's and CBOT's finest. I (I am proud to say) was one of them. The Big Onion will never be same.

I, like many (most) of my brothers in arms, have moved on to new adventures. The city's shoulders, still broad, are clearly hunching over. And yet, in the bars, comedy clubs and eateries the characters keep turning up. Good on ya, Chicago. And good on Tony Bourdain for doing it right.

 

Blame the Buck

The dollar was "too strong" in January and blamed for falling oil and stocks. The recent fort-night of falling prices has been blamed on a falling dollar. The dollar seems to have a strong connection to the Fed beyond Econ 201. The Fed is often blamed for being "too tight" and "too loose" based on the net change of some security. The greenback suffers the same indignation. Erwin Schrodinger's cat would be jealous. There is another possibility, however, that neither conclusion is correct. The buck is neither too strong, nor too weak. The value of our fiat, like all others in a faith based system, is up for negotiation.

The current patterns have the SP future going to 2030 and the Naz to 4294.17