If you have followed the F_E_D analysis since Sept 13th 2012, then you might remember not only did I think the F_E_D was looking for a way out, despite having just launched or announced QE3, but there were some very specific observations.
One came from Kevin Warsch who I followed as a former F_O_M_C member and his very frank assessment that (paraphrasing), "Getting in to accommodative policy is very easy, extracting yourself from it and winding it down is just about the most difficult task the F_E_D ever faces", therefore the obvious question was the cost benefit analysis.
You may wonder why I thought way back then the F_E_D was looking for an exit which was correct, it was because of the way they changed their guidance mechanism which had always been VERY objective with a calendar date and then a new yardstick was first mentioned, and then toyed with and then implemented. This new guidance/yardstick was about as subjective as you can possibly get in judging QE and a possible end to it based on economic data. That may seem to be common sense, but economic data is so east to manipulate, in fact the first quarter of the new year is garbage, you can't trust any data because of goal seeking seasonal adjustments. Just look at CITI's Economic Surprise Index and you'll see the pattern every year during the first quarter.
Another one of my personal observations that I've heard no where else until today was that the F_E_D, although a quasi governmental entity, is a corporation like Bank of America with shareholders. My take was, "The F_E_D has to turn a profit and QE is starting to look like a drag with the balance sheet this large. TOODAY WAS THE FIRST TIME I THINK I'VE EVER HEARD THE F_E_D TALK ABOUT THEIR OWN CAPITAL LOSSES.
The rest of it I'm sure you can go through and probably not find too many surprises except this meeting sounded a little more like the summer meeting that sent the 10 year yield skyrocketing as about half of the members wanted to end QE by the end of 2013, some supported ending it at that meeting. We are now seeing that honesty come back rather than bond market lip service.
The bottom line, I think the F_E_D knows that QE is not efficient, I think they know as they mentioned "Risks to economic stability" that it has created a bubble that has no grounding in any reality and I think they are going to keep moving toward ending QE, while trying to seem more sanguine about the process as to not create too many sharp disruptions, but it doesn't take the market long to understand what they are up to.
As for the market itself, still, a slow march toward some damage as I did expect a transition from a short duration gain to the next trend. I will say it is slow and methodical, I'm very happy no pre-minutes positions were taken, there was no objective reason for it and it seems we were right.
However the 5 min Es chart still looks like this.
I'm not going to assume though that this is a slow transition to the next trend, that hasn't been the market's M.O.
All in all, the market is on the same trajectory as it was before the release of the minutes. I'd like to see a smoking gun before taking any new or changing any current position.
It may be that some extremes just creep right up on us, for example...
For now, I still don't see strong, objective evidence to make any major moves, I think we were right not to before the minutes.
I suspect the VIX/VXX is going to be a major timing bellwether as to when to make those moves.
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