Yellen Feddles While Bitcoin Cruises
I was sitting up late on Friday night (August 25 - US time) watching markets. Alarm bells rang as the "stop loss triggered" email rocked in to the inbox => stop loss hit on a USDCHF long trade. I open up the trade terminal and see all my other trades have gone from somewhat negative (when I checked a few hours before) to hugely positive. At least I was on the right side of some of that.
What was that? Simple: A speech at Jackson Hole
It was the market reaction to the Chairwoman of the Federal Reserve, Janet Yellen, talking at Jackson Hole in a much anticipated speech. Currency markets right across the world showed a massive whipsaw reaction as the words flowed - first bashing the US Dollar down and then chasing it up as the words were digested. Over the last 10 days or so the headlines have been filled with "caution ahead of Yellen speech". Here are a few culled from a Google search (note they are dated August 25):
I also mine and trade Bitcoin. I do a regular review of Bitcoin markets but have not done one for 2 weeks basically because the Bitcoin price has been tracking sideways. This price action in currency markets prompted me to check what Bitcoin had done against the US Dollar on August 25 - nothing; nada; just tracking sideways in a range of only 1%. You can see the review here - and also catch my thoughts on the trading window.
Now this got me thinking about what the role of Central Banks (like the Federal Reserve) is and how it is currency markets react so strongly to a speech.
When I studied economics (in the 1970's), Professor Milton Friedman - 1976 Economics Nobel Laureate - (I did a course on Monetary Economics with him in Johannesburg) was arguing that Central Banks had one job - manage inflation. The inflation cycle of the 1980's cemented that role and that is pretty well what the Federal Reserve was doing until 2008. The mandate was extended to ensure financial stability through regulation of banks and other financial intermediaries. Somehow in 2015/16 - with market upsets in Europe and Japan, and China, and Brexit , and, and, and, the Central Bankers have quietly assumed a mandate to massage and (even) manage asset values other than interest rates.
This is all very well. Central Bankers participating in markets in ways they have never done before. Just this week this is the type of headline we see - this pension fund basically does the work of the Bank of Japan
No central bank of a developed country equals the Bank of Japan in trying to manipulate the stock market up by buying equities. The BOJ has done this for years. With breath-taking ineffectiveness.So on July 28, the BOJ announced another stock market pump-up scheme: it would nearly double its annual purchases of equity ETFs from about ¥3.3 trillion to ¥6 trillion ($60 billion).
http://www.zerohedge.com/news/2016-08-26/bank-japan-prepares-crash-triggered-fed-tightening
And on the front page of Bloomberg.com today was this one - it grabbed my attention.
In the article are two very important charts - they show the growth in asset bases for the European Central Bank and the Federal Reserve. The one for the Bank of Japan will look the same - it also holds a lot of equities.
Data and charts from Bloomberg.com http://www.bloomberg.com/news/articles/2016-08-26/central-banks-may-need-to-start-thinking-about-losing-weight
This raises a few questions in my mind. What skills do the Central Bankers have to manage portfolios like this? What is going to happen when they choose to unwind these positions? Can they ever unwind the positions? What happens when the bond portion hits maturity?
There is nothing more uncomfortable in a market when a big player is stuck on one side of a trade with a big pile of hoardings which they have to unwind - ask Bunker Hunt.
It all ends in tears - and the man in the street cops it. And the holders of Bitcoin could well be smiling - we did on Friday August 25 because nothing happened while the Feddler played her fiddle.
Articles referred to
http://www.economist.com/blogs/buttonwood/2016/03/monetary-policy
http://www.thebanker.com/International-Meetings/View-from-IMF-World-Bank/The-rising-role-of-central-banks-in-monetary-policies?ct=true
I'm convinced that the Fed is going to raise interest rates in Sept.
Ignore the market gyrations, they did that the same the last time the Fed hiked, and indeed when the Fed stopped QE - they are trying to panic Mrs Yellen into staying her hand. The idea is "See, look at the volatility, don't pull the trigger, it will get worse". She ignored them the last time, and she ignored them when she stopped QE
People have a lot of criticisms of the Fed, but they relate to Alan Greenspan's era. Mrs Yellen seems to be less spooked by markets than he was.
This is a key part of my point. Central bankers around the world are becoming pre-occupied with asset values and not just with monetary and financial stability which is their mandate.
I calculated the gyrations on August 25 - volatility high to low
USDCHF 1.73%
EURUSD 1.46%
USDJPY 1.90%
AUDUSD 1.87%
XAUUSD 1.83%
BTCUSD 1.31%
As to the timing of the next rate hike - in the good old days we never knew when they were coming. And then Ben Bernanke got spooked by market reaction to "I am ending QE" speech and started signalling. The truth is, the markets are already sending in the signals. The next chart is TED Spreads - the difference between 3 month interbank rates and 3 month Treasury bond rates. The uptick is clear - new high on December 17, 2015 (note this data from St Louis Federal Reserve is up to August 19 - they update weekly - check in a few days to see August 26 added).
Context is always important. This uptick looks very tame when taken over a 10 year view that includes the GFC. And ultimately the Federal Reserve will be well served not getting behind the eight ball when market rates accelerate.
The data is telling me September - I think the Feddler is too cautious.
Date from St Louis Fed https://fred.stlouisfed.org/series/TEDRATE - worth digging around at all the interest rate charts they offer. This is my favourite risk index as it shows a rate hike in September will not destroy the markets
https://fred.stlouisfed.org/series/BAMLH0A0HYM2?cid=32297
Thanks for posting this update. I look forward to watching the video latter tonight.
Interesting times in the markets. I have a feeling that the unexpected consequences can only be good for Bitcoin, especially as one can readily use Bitcoin in all sorts of transactions
Bitcoin has held very stable in a side way movement for a few weeks, good to stabilize, now waiting for the adjusting up or down. In South Africa just one wrong word in the direction of our Financial Minister and we bounce around like a yo-yo, so understandably the same happens elsewhere. Moral of the story, never keep all your eggs in one basket and keep an eye on them all the time! Thanks for an informative article.
very informative, thanks!
Thanks. Markets are all about learning as no two days are the same
No truer word spoken, it is an ongoing learning curve.