Macro Brief: How real is real?

 

"All truths are easy to understand once they are discovered; the point is to discover them."  Galileo Galilei

 

 

The 60 bps move in US rates have so far had little impact on the risk-on vs. risk-off market. Yes, AUD vs. USD is small down and yes fixed income is having a negative year (outside: Club Med)….but how real is this move and why is it happening?

 

We see a major change here which will be confirmed tonight if 10yr close again above 2.1000 – there is something  changing in the "perception" vs. "reality" trade. The easy part of not fighting Fed is done – now comes the hard work.

 

My great and educated colleagues Peter Garnry, Mads Koefed and John Hardy have provided me with some ammunition which could be of interest to you:

 

 

Mankiw model looks at where Fed should be for them to be in line with a dual mandate. Looking at the chart Greenspan's major policy mistake in 2003/2005 stands out (Red line lower to flat while inflation and labor market took off) – now we are entering EQUILIBRIUM – but as the great George Soros  says: No market is ever in balance for more than a nano-second, and the present management at US Monetary Printing Inc. – sorry Fed is unlikely to react, like Greenspan, before they are behind the curve.

 

What is also interesting is that the forward curves is moving up – so not only is 10 year yields higher – the whole curve is higher including periods inside UNCHANGED Fed.

 

Add to this my piece from yesterday about volatility being paid in 1 year and 2 year – the "truth" – whatever it is – is hard to ignore – something have changed.. It may only be that the probability of PRINTING INFINITE have become PRINTING for decades but something is clearly happening – the believe in "unconventional measures is waning" – and fast it seems.

 

All the research I get this morning talks about the move higher in yields being overdone (funny how it's never the case the other way around?) but…I think Galilei was probably smarter than today's pundits. (He did not need to update his Facebook profile so he had more time to actually think about things?)

 

 

 

Likewise Bunds and Spanish yield is apparently breaking recent trend – is this the price for retrospectively changing legal language – the impact of Tier-1 capital deleveraging or?

 

 

I think it's all of above. The banks are still underfinanced – take away LTRO and Europe banks are toast – the leverage has risen not decreased in Club Med banks as they have bought more of the toxic government bonds which almost made them go under in the first place; But if you are sacked whatever happens as CEO of a Club Med bank why not put everything on Red? Game-theory at its simplest – and most convincing.

 

My conclusion is this:

 

The early riding the wave of easy money is over- Fed will still try to engineer further easing, but the truth is harder to ignore – and sometime soon even the dogmatic FOMC will need to consider an attempt for an exit strategy – is that not the whole point of this "new" open communication policy they have introduced with great fanfare?

 

Nice weekend

 

Steen

 

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