Links – 2017.10.27

Big day for Catalonia.  I don’t know how we got to this place in Spain.  It seems like the Catalans have been threatening to leave for as long as I can remember.  Spanish bonds are down (obviously) and yet the ECB is continuing to tighten.  Political risk is a real thing, guys.

  • Catalonia parliament votes to become independent.  CNBC
  • Trump gets to fill more FOMC seats than any president since Woodrow Wilson.  Daily Reckoning
  • PBOC testing demand for more easy money.  Bloomberg
  • Mnuchin talking about the tax plan.  FT
  • The Euro and European bonds are getting smushed.  Reuters

The Taylor Rule, part 1

I keep referencing an old blog where I broke out the pieces of the Taylor Rule … poorly.  This will be the new one that I point to, and I think that this is pretty interesting so far.  The media is kind of fetishizing the Taylor Rule because it makes the race more interesting: “Will it be Super Dove Janet Yellen who plays fast and loose with the rules or Super Hawk John Taylor whose decisions are super predictable because they’re all based on a perfect model?”

Continue reading “The Taylor Rule, part 1”

Sources say we have no idea who the next Fed Chair will be

This is so weird … why is the race for Fed Chair so much like reality television?  Is Trump making this happen for some reason?  Do people just love the horse race?

Reuters headline: “Fed chair choice down to Powell, Taylor, one source tells Politico”

To be fair, I can’t find the Politico article.  But that headline totally misrepresents the reality of the story.  Sentence 1 of the actual story in Reuters:

President Donald Trump’s search for the next chair of the U.S. Federal Reserve has come down to Fed Governor Jerome Powell and Stanford University economist John Taylor, Politico on Thursday cited one source as saying, while another counseled caution.

50% of our sources say Yellen is out!  50% of our sources say we don’t know who’s out!

I’m so annoyed at Reuters that I’m not going to link to their article.  Don’t waste your time looking for it.

Links – 2017.10.26

Am I extra attuned to it recently, or is there a TON of talk about inflation these days?  The BOJ doesn’t care about low inflation, the Philly Fed says some inflation goes away because stuff is free online, and Yellen is talking specifically about changing inflation expectations.  Weird.

  • Don’t bet on Trump’s Fed pick to really move the bond needle. FT
  • “No need to take excessive steps to meet price target.”  Reuters
  • The ECB decision is exactly what they said it would be.  CNBC
  • Measuring the “Free” Digital Economy.  Philadelphia Fed
  • Did Yellen dent the Fed’s credibility on inflation?  Bloomberg

Former Fed Governor Tarullo doesn’t much care for models based on inflation.

I linked to this piece in the Links post the other day, but I wanted to dive into it a little more thoroughly, as it pertains to the the Fed Chair, Monetary Policy, etc.

I’ll talk a little about my questions regarding internal Fed politics (maybe too much), and then look at former Fed Governor Tarullo’s white paper “Monetary policy without a working theory of inflation”.  He offers some really good insight into the policy and projection making practices at the fed.

Continue reading “Former Fed Governor Tarullo doesn’t much care for models based on inflation.”

Links – 2017.10.25

Ooo!  Trump asked Republicans what they think of the candidates!  Ooo!

I like to think that he did this like we did in grade school where your teacher doesn’t want the popular kids to influence the vote.  “Everybody put your head down and close your eyes.  If you think Jerome should be Fed Chair, please raise your hand.  Mitch, please stop peeking.”

  • Trump asked for Senate show of hands on who he should make Fed chair. CNBC
  • Co-Fed Chairs?  That sounds like a terrible idea … MarketWatch
  • Brazil should be fine with Fed tightening because severe recession lowered inflation.  Reuters
  • Regulation leading to consolidation?  Fewer financial institutions and size of financial sector larger.  ECB
  • Model assumptions may be leading the ECB to being too dovish.  Bank of Finland

Continue reading “Links – 2017.10.25”

Style drift.

As Central Banks plump their balance sheets with treasuries and mortgage backed securities (and stock market ETF shares … Japan), we should expect to see a push out the risk curve as investors seek yield.  I’ve written about this before.  I’ll be writing about it more, because it makes me nervous.

In trading, smart risk management teams keep an eye out for what we call “style drift”.  Essentially, a trader is good at trading one thing, opportunities in that strategy/market become harder to come by, so the trader starts changing.  He adds more leverage to the same strategy, or he removes some of the hedge (increasing return by lowering the cost of the hedge), or he drifts into ancillary markets (“I know a lot about trading oil, so I probably can make some money in distressed debt of downstream oil and gas companies” … that’s a big leap, but it’s in the right direction).

Continue reading “Style drift.”