Between a Rock and a Hard Place -- Steve Plant
6/7/2006
fxa.com
5:00 AM New York time. I try not to be a chimer-in. If everybody is talking on a topic, I just figure the last thing my readers need is yet another opinion. I’m going to make an exception this time and stick my two cents in on this whole Fed/Ben Bernanke thing. Ben Bernanke does not have an easy job. And he’s new at it. But he is making his own situation more difficult with each utterance. His latest is to make sure the markets have confidence in him as an inflation fighter. That’s great Ben. Try to squeeze out that last tenth in core PCE even if it means throwing the economy into a tailspin (right or wrong… the growing perception). Before that he had the markets thinking the Fed would pause in June. Like a trader out of synch with the markets, he just needs to clear the sheet, step back for a little while, and say nothing. It would do him well to simply be an observer for a little while. He would notice that the stock market continues to act abysmally. Hmmm… More than a few savvy trader/investors have pointed to the 1987 analog. Jobs, homes, and investment markets, in that order, help generate our nation’s sense of aggregate financial well being. Lets see… two out of three are headed lower, the third is becoming questionable. Then there is the behavior of the yield curve. What is that saying Mr. Bernanke? The long end closed at its highest since mid-May yesterday. More in detail on that later.
The Fed now looks guaranteed to hike again in June… as of today. That view is subject to change. Such is the nature of data dependent decision-making. I say it will not matter either way to all but traders of the extreme short end. In the final analysis, Mr. Bernanke is doing more psychological damage to the equity capital markets, and ultimately, helping to drive long rates down farther than if he had never hinted at all. Mr. Bernanke is missing the forest for the trees. He seems overly concerned with managing market expectations and building his own credibility. But in forcing both issues, he is actually losing them. The Fed has already hiked 16 times. Those pressures continue to work through the pipeline. What’s the hurry? Let them work. We may be at, or near the peak of yet another business cycle. The Fed already has the rate-hike trade on. They have the luxury of sitting on the sidelines for a bit to see how the trade develops. And there is evidence that it is working. They should be able to relax. They should be painting a picture of a Chairman with his feet up on the desk, confident in his position. They can put more on down the road if needed, or wait and take some off in six months. Either way, the majority of the work toward taking the edge off the economy and whatever inflation they can actually control, has already been done. Instead… the Fed, through Mr. Bernanke, is acting like a frantic trader with a bad position. They seem to be agonizing over (and torturing the markets along with it) the Fed’s next move, which, most would argue will have marginal impact anyway. Chill fellas!
As far as bonds go. Today’s action speaks volumes to the underinvestment and bad positioning in that market. While currencies reversed the balance of their gains from Payrolls (and continue to do so this morning), bond prices have continued to crawl higher. The short dollar trade is already well participated. Nobody or their uncle owns bonds. If I had to guess, more than half of the previously-dollar-bullish commercial and investment banks have swung their opinions since April. But not a single one of them, from what I continue to hear in the financial media, have yet to come out and get bullish bonds. They are caught between the mathematical reality and an environment which increasing fits the criteria for a bull market in bonds. Within the news-stimulus-price-reaction outcome for any market, are clues to how participants are positioned. The bond market is speaking loud and clear.
I took a chance and bought back some gold yesterday down about $17. I’m sure (as usual) I’ll be early. It is down another $7 as I write this. I have none of my usual indicators to point to an exhaustion bottom. But as I have repeatedly said, gold has been one of those markets where if you don’t buy it when the sh** is hitting the fan, you can easily miss 10 –20 dollars of opportunity right from the start. I’m hoping today’s action will simply be a retest of the lows from Friday, and it will all be over with a minor poke through followed by a rally back. $610 looks like a real good spot from a technical standpoint. That’s roughly where gold’s quasi-parabolic acceleration started from. We’ll see.
I haven’t said much about the dollar lately. I don’t think there’s much to say. This entire Payroll/Bernanke whipsaw is nothing more than that. All of that action easily fits within the confines of what I see as a continuing sideways consolidation. Indeed… it is a consolidation that has taken back very little of the dollar weakness we experienced between mid-April and mid-May. That again speaks to the level of commitment that larger, longer-term participants have to this trade. And it again points up the silliness of this Fed debate, when there are so much larger issues at stake.
Steve Plant
FXA |
