"Last night I warned to beware or market action following an FOMC policy statement. Historically there's been a knee-jerk reaction that changes either the same day or within several days" 11 a.m. 4/27/2011
"I've got to say, I've been doing this for a long time and I don't often get nervous about much anymore, but I have to admit, there's some energy flowing through me regarding the FOMC announcement tomorrow. Almost as if we're about to witness something historic, in a way we will."
3:52 4/26/2011
The Red Arrows point out the day of the FOMC meeting, 4/27/2011
Below, here are some currencies vs the Yen
A few things to note, 1) the Fed effect held up, I think the trend underway is the market's true reaction to Fed policy. 2) Risk Assets (specifically commodities and precious metals) have been hammered 3) There's an unwinding of the carry trade in the Yen. 4) Many of the important divergences I've shown you have all had one thing in common, they all started April 28th.
What where the key statements from Bernanke?
With regard to QE3:
"The trade-offs are getting less attractive at this point. Inflation is gotten higher. Inflation expectations are a bit higher. It’s not clear that we can get substantial improvements in payrolls without some additional inflation risk. In my view if we are going to have success in creating a long-run sustainable recovery with lots of job growth we have to got to keep inflation under control. We got to look at both parts of the mandate as we choose policy."
With Regard to the monetary base:
"What matters primarily for interest rates, stock prices and so on is not the pace of ongoing purchase but rather the size of the portfolio that the Federal Reserve holds. So when we complete the program as you noted we are going to continue to reinvest maturing securities both Treasuries and MBS and so the amount of securities that we hold will remain approximately constant.
At some point presumably early in our exit process we will I suspect based on conversations we have been having around the FOMC table it’s very likely that an early step will be to stop reinvesting all or part of the securities that are maturing but take note… that step does constitute a policy tightening"
While Bernanke says the above does not constitute a policy tightening, he may be correct, he may not, but today's comments from Kocherlakota certainly hint at policy tightening, by 50 basis points. Bernanke has claimed he's trying to make the Fed more transparent, the press conference being a first of its kind is certainly a symbolic gesture. Today's Fed comments could certainly be taken as a warning directly from Bernanke, in which case, something must have changed very quickly in the Fed's view.
Right now we are seeing some of the most heavily margined and speculative assets being sold off. I wish I had the capacity to be able to draw a chart showing the interconnectivity of all of the different asset classes and say, how unwinding in the Yen Carry trade effects other asset classes, how declines snowball because of margin maintenance and how other assets are sold to meet margin calls. It's a confusing web of arbitrage, margin, leverage, hedging, etc. However, it's pretty plainly visible that there's a massive risk liquidation, whether self imposed, forced (i.e.-Silver margin hikes) or both. This is something that is difficult for people like us to understand. A very small move in an asset can cascade into big trouble when dealing with the kind of leverage these institutions have access to.
In any case, the point was the Fed effect and what the emerging view of the FOMC meeting has matured into. And by the way, watch for something big coming out of Japan very soon.
No comments:
Post a Comment