Jeff Gundlach, CEO of DoubleLine Capital, told Reuters last night that The Fed has lost control of interest rates:
“What else do you need to call it an inversion?” Gundlach said in a telephone interview.
“Everyone is parsing all of these little arbitrary things. But we’ve got an inversion.”
And, as if Powell didn’t face enough pressure from President Trump, who slammed him again this morning:
“The only problem we have is Jay Powell and the Fed. He’s like a golfer who can’t putt, has no touch. Big U.S. growth if he does the right thing, BIG CUT – but don’t count on him! So far he has called it wrong, and only let us down…”
Gundlach blasted The Fed Chair:
Powell “can’t put a back-to-back consistent message together. It is different at every single meeting – the mid-cycle adjustment statement is not going to hold up.”
Still, for now, all algos’ eyes are set for today’s Minutes and Friday’s J-Hole speech for signs of some new easing promises.
And, seemingly confirming Gundlach’s comments from last night about The Fed (but on a global scale), former fund manager and FX trader Richard Breslow notes that “the world was laid bare by [this morning’s] German bond auction.”
If overnight volumes were described yesterday as light, then we need a stronger word for today. But there have been some nice-sized moves that probably do count anyway. Bonds are down, but not much. Equities are up, yet still within what looks like a new range while we await the next trend. And foreign exchange is becalmed. The dollar is bid, but unable to break out higher. That all pretty much makes sense. Especially if you look at it in the context of how the market has been preparing itself for the big back-loaded events still to come this week. But, oddly enough, there has been muted reaction to the most important and interesting event of the day.
The German government auctioned 30-year bonds with a coupon of 0% at a yield of negative 11 basis points. And it didn’t go well. Of the 2 billion euros worth on offer, the Bundesbank was forced to retain 58% of it. Calling it a “technically” failed auction doesn’t make it any less actually the case.
And for those who think the ECB, or any other central bank, can keep plumbing the depths of negative interest rates to wring out ever-diminishing benefits, it should be cause to pause and consider.
The market’s initial reaction has been remarkably muted. Presumably because traders know that as good, bad or indifferent as the results were going to be, the ECB is going to press on with a full dose of additional stimulus. That is how bereft the central bank is of new ideas. And it makes the reality of monetary policy as the only game in town all the more scary.
Getting rich off of the greater fools theory has been a wonderful strategy. It took a lot of the guesswork out of worrying about asset bubbles or the nuances of economic numbers. You have to wonder whether, in a world where the entire German yield curve is negative, this can go on indefinitely. Especially in a world where investors have begun to question just how far forward guidance can be relied upon. Economically, practically or politically. Even central banks will have to ultimately, if belatedly and begrudgingly, accept that what they are doing may be cool for asset prices but does nothing for economic growth or getting inflation to target.
[ZH: This fits with UBS’ view that BTFD has stopped working:
“a world where leading indicators are accelerating is generally one where a correction in equities is an opportunity for investors and ‘buying the dip’ gets rewarded.” However, and in contrast to a generally rosy economic environment, “today’s backdrop with PMIs (purchasing managers indexes) in the low 50s and rates arguing for further declines often results in buying the dip being a losing proposition.”
Specifically, when looking at history over the last nine full economic cycles going back to 1974, Trahan and Blackman find that buy-the-dip works the best when leading economic indicators, like PMIs, are accelerating. Indeed, during that period of either recovering or accelerating PMIs, called by UBS the “risk-on” phase, buying-the-dip had an almost perfect record with the S&P up 27 out of 27 times.
However, after the readings peak and the ensuing “risk-off” phase, the performance is mixed, with BTD working less than half the time, or 4 out 9, when PMIs are approaching the contraction phase. And when PMIs dip below 50, marking the “risk-aversion” phase, dip-buying truly dies, leading to profit just 1 out of 9 occasions.
This is shown in the chart below.
Of course, as readers are well aware, the two latest mfg ISM prints have hugged the 50-line, and represent the gray zone where the S&P is up only 4 out of 9 times after a sharp dip.]
If you want an object lesson in long-term investing, as opposed to flipping, in this not-so-brave new world, take a look at the comments on Tuesday from the chief investment officer of Japan’s Government Pension Investment Fund. And when you do, keep in mind the words “largest pension fund in the world.” Over the last three months it has lost money in fixed-income, equities and foreign exchange. Half of the fund is in domestic assets, including negative yielding JGBs. And the returns on their overseas investments suffered from the safe-haven status of the yen.
It’s tempting to indulge in a little schadenfreude with these sorts of results. After all, it shouldn’t be easy to lose in every asset class. But if this is a peek at where the world’s investing landscape is heading, there’s little room for amusement.
You can understand why there is the belief among academics that, with rates as low as they are, and central banks having less and less leeway, a shock and awe approach to rate decisions may be the most effective policy strategy.
But that also smacks of the desperation of a Hail Mary pass. And they never happen when things are going well. Still, it does help explain some of the really aggressive fixed-income options trades that have been executed, just this week, around the upcoming events.
All of this makes guessing what may come out of Jackson Hole all the more interesting. Particularly because the Fed has more room than anyone else and can provide cover for whatever the ECB and BOJ end up doing at their September meetings. It means that how the G-7 goes matters even more than we thought, in either direction. And it should make everyone all the more angry that other policy makers are making this situation far worse than it need be. Especially since past errors of omission are now compounded by ceaseless errors of commission.