election 2016: it’s the fed, stupid. or is it?
TRANSCRIPT
Tuesday, June 14, 2016 Ryan Renicker, CFA
Election 2016: It’s the FED, Stupid. Or is It? _____________________________________________________
The QE Question: 8 More Years. Then What?
Yes, it is the summer. Yes, it is an election year. Yes, volumes are slow and Wall Street bonuses are
continuing their inevitable long-term secular decline as margins pretend to be orchestrated by the
2008-2006 Federal Reserve, declining to nominal rates of about zero, real rates negative. Here, I will
pay you (client / bank) if you hold my money. And, the longer you hold it, the longer I will continue to
pay you. This may seem like a unique point in Wall Street’s history, although I just look at it as Wall
Street.
Always something. Spitzer. LIBOR. Lehman. Bear. Yadda, yadda, yadda.
When I talk to many of my colleagues, I have noticed over time how the FED/QE/$$$ Policy Headline
has slowly faded from the mega-theme of analysts to – well – just kind of how things are going to be
and there is not really anything that is likely going to change so let’s go to the Hamptons and take
back some of the money from the bank and use the interest to but some more drinks as the market
remains on autopilot.
I’m in Texas, so the Hamptons for me is a creek about ½ a mile from my apartment. Oh well, at least I
don’t save too much of my money in money market accounts so I guess my extra “income” can be
used to pay for the s, so the Hamptons for me is a creek about ½ a mile from my apartment.
Oh well, at least I don’t save too much of my money in money market accounts so I guess my extra
“income” can be used to pay for the (slowly) rising fuel prices, which add up when your car is a 500
horse power V8 and driving 100 miles is simply another errand. Nothing like NYC. Diversity. Good.
Now, here comes the technical discussion that I wrote rather quickly (as always) and – unlike having
to deal with the headache of arguing the proper way the English language as well as the structure of
simple words using a centuries’ old grammatical method to comply with some strange policy to
prevent the alphabet soup of red tape hangers from having to argue with the firm and employee(s)
about their interpretation of how to write a sentence that a fist-grader can write to someone in a snap
and the reader somehow can read the sentence without having to think about it, go ahead and just
assume they understand the meaning of what was written and invest their money without confirming
with the kid the validity of what was understood by the reader with what was conveyed by the kid. 2
minutes.
No big deal. And 99% of the time these 2-minute language lessons don’t ever occur.
So, I stated the obvious: the markets are trotting along, the Hamptons is selling more beer, the Fed is
doing business as usual, well at least since 2008. Not to mention the fact that this 8-year policy has
gone global and continues to be a game of tug of war in the FX markets worldwide with QE or QE-like
policies and a bunch of useless chatter about currency wars and dumping the dollar as a reserve
currency.
Yeah, I have a trillion dollars and I am afraid that it is going to lose value so I’m just going to buy a
bunch of ……. well … I guess it has to be currency so let me try the Euro market and the JPY
perhaps. Yeah! That’ll show ‘em! Aww man, there aren’t’ enough Euros or Yen to exchange my
dollars for and I do not subscribe to the concept of free enterprise so the supply and demand concept
is not to be considered.
I know, I will buy bits and pieces of a bunch of currencies and eventually feel safe that our central
bank will perhaps barely have enough funds in it to buy the U.S. dollar (what?) and de-value the
Yuan, fund the State Owned Enterprises if all of the commodities in our inventory and excess
investment in infrastructure becomes another cost of carry with no future benefit nor use. Don’t want
the banks and loans to jump over the 20% loan-loss benchmark and have to dump our collateral.
Yadda, yadda yadda.
I guess I had to begin this (formerly) brief note about QE with some extra commentary because it has
been some time since I have writ some time since I have written anything for you guys. OK. Now that
that’s out, here goes:
Will QE continue its clandestine actions and eventually become simply the standard, status quo,
something that should have always been conducted with such energy and magnitude since the
Nixon? This year, I believe that – yes – we might see 25 bp interest rate hikes or perhaps it will be
more barking and then… no, not a bite but barking about the likelihood that the barking might be
louder over time but no biting this time (again).
In short, doesn’t matter. Risk premiums will remain compressed. Everything is relative, right. YES,
that is what matters. I actually believe that it is likely we’ll see short-term rates bumped up perhaps
50 bps by December and bang our heads as 2-year, 10-year and other longer-term rates stall and
term spreads actually tighten.
Well, no really big deal. So, more chasing yield, purchasing riskier assets as year-end approaches
and continue to see fund flows and Fed actions or rhetoric make the action-packed election period
and Q3/Q4 Wall Street “panic time to make the cut before the year end layoffs after the annual
“holiday parties” feel like a long, drawn out extension of summer: trading levels stable but margins
nothing. Interest rate arb is becoming even more of a guessing game, and risk premiums – according
to Business School nonsense – are actually very low and should be low because the numbers do not
lie! Buy. Buy. Buy. And then wait.
Now, I mentioned that this is an Election year. It is going to ultimately lead to a one-party state,
Socialist policies will continue to blind the Muppets that the old Red is now even better, with a White
and a Blue added (for free!).
Yet, Wall Street – and most people – is a short-term game. Socialism in a year. Whatever, we’ll have
a nice Holiday Season and get paid and just, well, pretend we are Muppets (although not
intentionally!).
QE is, in my view, going to continue to remain a consistent tool that the Fed will continue to keep
holding onto – out of their pocket most of the time, not hidden in their pockets as insurance – the QE
and low interest rate approach. Passive, not wanting to rock the boat that has been floating along
since the great times of TARP and, more significantly, the time all of my incentive / bonus / reward
plan “pay” that I was “given” in exchange for equal or greater value in the services I provide in return,
such as building the Equity Derivatives Research team – worldwide – from the ground up in 2004 to
the #1 Ranked II Team in just 3 short the time all of my incentive / bonus / reward plan “pay” that I
was “given” in exchange for equal or greater value in the services I provide in return, such as building
the Equity Derivatives Research team – worldwide – from the ground up in 2004 to the #1 Ranked II
Team in just 3 short years!
Ahh, ha ku na ma ta. At least I had only worked there a few years and didn’t lose as much as the
long-time employees of LEH that held millions of $ in LEH (restricted, generally) stock.
Back to QE!
Short term, simple:
QE will continue to prop up all risky assets and likely even compress the 10 / 2 treasury spreads the
12 regional presidents of the Fed and the Chairman continue to remain very risk averse (career
wise?) and continue to pursue the “when in doubt, do nothing” strategy. After all, since it worked for 8
years (did it?) it will certainly continue to work! Past performance, etc. is highly predictive of the near
future, medium term future as well as however long term transpires until something really forces this
boat to really rock!
Another incentive does factor in the career-risk factor, in theory, but even if the 3 appointees under
President Bush back during the 2004 – 2008 term exit a term or a few years early than the maximum
number of years they can keep their positions it won’t really impact the composition of the Federal
reserve’s key policy makers ongoing use of QE, something that began BEFOPRE 10 out of the 13
regional presidents were officially confirmed by the Senate and could do anything.
Regional Fed
Term Start Date
President Term
Maximum Vulnerable for
Early Exit?
BOSTON JULY 2007 BUSH 2021 PERHAPS
NYC JAN. 2009 OBAMA 2023 NAH
PHILLY JULY 2015 OBAMA 2029 NO WAY
CLEVELAND JUNE 2014 OBAMA 2029 NO WAY
RICHMOND AUG. 2004 BUSH 2018 OBVIOUSLY
ATLANTA MAR. 2007 BUSH 2021 PERHAPS
CHICAGO SEP. 2007 BUSH 2021 PERHAPS
ST. LOUIS APR. 2009 BUSH 2022 NAH
MINNEAPOLIS JAN. 2016 OBAMA 2030 NO WAY
KANSAS CITY OCT. 2011 OBAMA 2025 NO WAY
DALLAS SEP. 2015 OBAMA 2029 NO WAY
SAN FRAN MAR. 2011 OBAMA 2025 NO WAY
BOTTOM LINE:
Status quo continues into at least late 2017.
Credit spreads continue to trend tight.
Yield curve term spread 10-2 remains tight and could flatten further.
Federal reserve doesn’t want to rock the boat. QE bark continues.
Some possible bite by the Fed. Bark or Bite, doesn’t matter. Market pricing in a nibble.
And, I MUST SAY THAT I CAN’T HELP IT SO HERE’S A QUICK ASIDE:
Composition of the Fed: again, status quo for the most part; although it would be a
convenient move to for the Socialists to Push in 3 new commandants early next year
to make the Politburo more likely to, well, pretend like they are discussing something
and conveying unique perspectives that might clash with some of the other members,
but reality is that group think will be what appears to be going on when the rubber
meets the road and either they all agree to agree or they are indirectly forced to agree.
Oh well, Muppets all around and the United States is going to continue to become a
one-party state (very quickly, now) as policies add Electoral Votes for Texas and
California and Florida due to immigration, making them more important than they
already are, substantially so.
Likewise, immigration policies are going to solidify all of these states – YES, EVEN
TEXAS – to the Socialists. Fed the same. Supreme Court the same. Congress, the
same (particularly among the U.S. congressional makeup).
Oh well, I guess that’s just another day in D.C.
Here on the street, Short Term rules and that’s that, at least that’s my 2 cents for today.
Happy trading.
___________________________________________________
ANY QUESTIONS? COMMENTS? IDEAS?
CONTACT ME! COME TO THE NEXT CFA / DFW MEETING!
AND … LET’S TALK SHOP.
____________________________________________________
NOTE: THIS IS NOT A RESEARCH PRODUCT. IT IS JUST SOME OF MY THOUGHTS ON PAPER.
TradeCrafters