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Friday, 15 December 2017

The power of two little words

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Anthony Peters on Yellen and her misguided forward guidance.

Is “anytime soon” to time what “a piece of string” is to length? The outcome of the two-day FOMC meeting would have been confined to history as a yawning non-event, has Fed boss Janet Yellen not declared in the subsequent press conference that the committee would not begin tightening monetary policy “anytime soon” which every Fed watcher in every corner of the globe had taken as an opportunity repeat what we already know.

“Tapering” – I’d still love to kill the idiot who coined that phrase – is at an end. In other words, the first phase of withdrawing the provision of ultra-cheap medium and long-term money to the economy by way of Fed bond purchases is over. Quantitative easing is done just at the time when the ECB is reluctantly being drawn into the process. We have neither proof that it works nor that it doesn’t work as far as encouraging economic growth, but all those who predicted dire consequences when it was marked by the FOMC for gradual withdrawal never occurred. Remember the “taper tantrum” of summer 2013? Now, on the day on which QE began its final journey, the Dow Jones Industrial Index closed at 17,156.85, yet another all-time high. I think it was the 17th of the year.

The key, however, is the phrase “anytime soon”. Way back, Professor Yellen indicated that the first tightening move was to be expected no sooner than six months after the withdrawal of QE was completed. That is due to happen in October which should, were the Fed to ever let itself be nailed down by statements made in the past, have the expected date for the first increase in the Fed Funds target rate in April. Where’s the quiz? March or April have been the most likely dated for the tightening. So does not “anytime soon” translate into “six months from now” and if so, where is the fabled long-term thinking of a monetary policy? I would have thought that in central bank language six months hence is as close to tomorrow as one can get.

Now think of the panic in equity markets when “anytime soon” is taken out of the statement, be that on October 29th or December 17th. I fear that these two little words will take on ridiculous importance and that retaining them in the Fed’s vocabulary at this late stage in the money-for-nothing cycle might come home to haunt the FOMC. If that is what forward guidance is made of, I’d be happy to live without it and to make up my own mind on what to take from the data and what to think the Fed might either do, or at least should do.,

Although the economy is clearly expanding, it is not doing so at a pace which is deemed by many economists to be consistent with the point in the recovery cycle. Based on past experience, it should be ploughing away at closer to 6% than 4% and that it is neither doing not threatening to do.

Where’s the bear flattening?

Since late August, 10-year Treasury yields have risen from a low of 2.34% to 2.61% and the 2s/10s curve has steepened from 183bp to 203bp. Of bear flattening, no sign. How could there be with the front end so clearly nailed down until the Spring? When the time does come, then the trade traditionally would be to run a 2s-5s-10s butterfly, long the wings as it is the intermediate sector which usually took most of the heat in the early stages of a tightening cycle.

Now, however, the belly of the curve looks under-priced rather than overpriced and I would be tempted to short the wings. The swap curve looks very similar to the cash bond curve and the same trade could be put on that way too. I don’t have easy access to the forward swap curve but if anyone can see the same value for six-month forward starting structure, that might be an even better trade.

England not getting off Scot free

Meanwhile, today is decision day in our Northern colony – or that is how it seems to see itself. I am fervently against Scottish independence; I think it is and always has been a poor idea. However, having seen the bitterness of the fight between the pros and the cons, I’m not sure that I want to live in a union which includes a significant minority which will struggle to accept defeat and will continue to behave as though it has been betrayed.

Scotland has been badly polarised and I fear that, should the No vote prevail, many of the Yes campaigners will not simply go home, throw away their posters and pragmatically get on with life. Scotland will remain a hot-bed of intrigue and conspiracy for years to come. England and the English will be made to pay, either way.

Thus, and not with enthusiasm, I somehow wish for a Yes vote. The world will not end if the union is broken up. England will remain England. We will have to make room for 600,000 or so foreign asylum seekers but most of them already have jobs and houses here and contribute disproportionately towards the wealth of this country.

As Salmondshire gradually discovers that liberally promising and spending is not all that easy without the funding having been unconditionally and irrevocably underwritten by Westminster, and when taxes begin to rise, even more of Scotland’s brightest and best might follow the call of the larger and more prosperous part of this island.

If they vote to go, let them go. We English, for our part, will be just fine.

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