Sunday, 31 May 2009
Perhaps we will end up with - "a scenario of financial asset deflation (stocks, real estate, etc) and commodity price inflation (gold, oil, agricultural goods) combined with either stagnation of GDP or negative GDP growth." This is the suggestion from a well-balanced article at SeekingAlpha.
The author tackles the conflicting views of inflation and deflation with refreshing honesty and candour because, as alleged, none of the experts or financial technocrats really know.
For what it's worth I would slightly paraphrase his summary above and suggest that we may end up with a combination of zombie bank balance sheets plus growing evidence that the alleged global elasticity of demand for commodities (i.e. without the US consumer sector acting as the dynamo that it has been in the past ) has been mis-understood. If the supply of resources is reaching a plateau and if the demand is more inelastic than currently believed, then the absence of a voracious US consumer, may not be a deflationary force for commodity prices. Alas the real elasticity of demand may be for labor in the developed world which will, in turn, act as a major restraint on incomes and drag on the recovery of the creditworthiness of major Western banks.
Coupled with an increased desire by central banks and other investors to seek out a safe haven alternative to over-dependence on the US dollar and the integrity of the Treasury market, it is not hard to see why there will be a growing appetite for commodities and hard assets. Longer term the real challenge for global markets is to find a global reserve unit of account which cannot, like any national fiat currency, be printed ad infinitum .
Saturday, 30 May 2009
The worst stock market crash since Black Monday during October of 1987 occurred during the first week of August of 2007. But nobody noticed.Further details can be found here .
On the morning of August 6th 2007, investment professionals were baffled with unprecedented stock patterns. Mining sector stocks were up +18% but manufacturing stocks were down -14%. It was an extreme sector skew yet the S&P index was unchanged at +0.5% on the day. The next few days would continue with excessive volatility. MBI Insurance, a stock that had rarely attracted speculation would finish up +15% on Aug 6th, followed by another +7% on Aug 7th, and then finish down -22% over the subsequent two days. The brief rally in MBI was short lived.
Only weeks later would investors begin to have insights on the dispersion patterns. Prominent hedge funds that had never had a negative annual performance began disclosing excessive trading loses with many notable firms reporting several hundred millions were lost - in a single day. Hedge funds were hemorrhaging in excess of 30% of their assets when the S&P index was unchanged. The market dispersion was the side effects of the synchronous unwind ignited by the hordes of "computerized" strategies that were caught off guard when history didn't repeat. It was the industry's first world wide panic - by machines.
Over the past decade, computerized (or black-box) trading has had a coming of age. Black-box firms use mathematical formulas to buy and sell stocks. The industry attracts the likes of mathematicians, astrophysics and robot scientists. They describe their investment strategy as a marriage of economics and science. Their proliferation has been on the back of success, black-box firms have been among the best performing funds over the past decade, the marquee firms have generated double-digit performance with few if any months of negative returns.
Through their coming of age, these obscure mathematicians have joined the ranks of traditional buy-n-hold investors in their influence of market valuations. A rally into the market close is just as likely the byproduct of a technical signal as an earnings revision. They are speculated to represent a one third of all market volume albeit their influence to the day-to-day gyrations goes largely unnoticed. CNBC rarely comments on the sentiments of computerized investors.
Conventional wisdom suggests that markets are efficient, random walks and that stock prices rise and fall with the fundamentals of the company. How then have black-box traders prospered and how do they exploit market inefficiencies? Are their strategies on their last legs or will they adapt to the new landscape amidst the global financial crisis?
Chasing the Same Signals is a unique chronicle of the black-box industry's rise to prominence and their influence on the market place. This is not a story about what signals they chase, but rather a story on how they chase and compete for the same signals.
From the Times (May 30th)
The expenses scandal has had a devastating impact on Labour and Gordon Brown, a Populus poll for The Times finds today.
Labour’s overall position has slid to 21 per cent, its lowest in polling history. When asked how they would vote in next week’s European election, those polled have put Labour in third place behind UKIP and the Tories, for the first time.
For US readers UKIP is the UK Independence Party which is dedicated to extricating the UK from the European Union and has, until recently, been a fringe party.
Friday, 29 May 2009
The fact that some establishment figures are suggesting that "mob" rule is emerging to replace politics as usual underscores the fact that the establishment is deeply worried. Inertia and arrogance are combining with their desire to retain an outmoded system of privilege and they are becoming increasingly uncomfortable about the growing dis-enchantment of normal law abiding citizens. These are regular folks who have played by the rules and see no possible justification for a political class to have abused taxpayers' money the way they have. In some cases criminal prosecutions need to be mounted to establish whether criminal and taxation laws have been broken.
The time is ripe for profound reform of the archaic British constitutional system which is completely unsuited to the modern era. Poliiticans have proven themselves not worthy to resolve the crisis and a general election should be demanded immediately.
1. The fear of inflation
2. The market's realization of higher default risk (even if still slight) in holding US government paper.
3. A risk premium for being denominated in US dollars.
They may be inter-related but they also can act independently of each other.
His argument essentially is that the drop in Treasuries this week, the ailing dollar and the reflation in the commodities market is actually a reason to be bullish. He doesn't quite get around to talking about trillion dollar deficits and the possibility of sovereign defaults but, to be fair, you can't cover everything in a note to clients.
Here is the abstract from his piece which is worth reading and a link can be found here .
If the Looking Glass economy is the new normal then Mr. Bond may well be right. For others reluctant to benchmark against Alice's make-belive inside-out world (however much fun it is for lively imaginations) his comments suggest outright denial of the fact that last October the financial system was on the verge of meltdown and had to be rescued by a massive transfer of liabilities from the private to the public sector. But undaunted by economic history (well it was seven months ago - and will soon be eight) Mr Bond concludes on a very cheerful note.
Some market participants appear to have misinterpreted the fundamental factors behind recent trends in US treasury yields and the dollar. The negative correlation between these two assets, with the dollar falling even as government yield rise, has been taken in some quarters as indicative of a looming US funding crisis. In reality, these coincidental moves, in our view, reflect a global economy that is gradually returning to normal.
Recent market chatter about the dollar and US treasury yields has managed to muddy the waters of what was a fairly simple and economically positive story. While we would never under-estimate the market’s ability to entirely misunderstand what is happening in the macroeconomy, the current example of inverting a positive into a negative is particularly egregious. Post hoc rationalisations usually get the story wrong, but they rarely get them upside down.
Transforming an uncomplicated bullish story into a convoluted systemic threat to the capitalist system requires a really very creative feat of imagination. To be sure, treasury yields are likely to continue rising and the dollar is likely to continue falling against more cyclical currencies as evidence for an economic recovery expands. However, such trends should be seen as a reflection of a world that is gradually returning to normal, not as portents of impending disaster..This evidence of a qualitative anchoring of bearish opinion would seem to have very bullish implications for ‘risk’ asset prices (my emphasis).
Mr. Bond strikes me as a clever chap and knows how to equivocate elegantly. One phrase I particularly liked was the following - "While we would never under-estimate the market’s ability to entirely misunderstand what is happening in the macro-economy" (my hyphen and emphasis).
So he's not quite going out on a limb because markets (and that presumably includes him) could be reading it all incorrectly. To use his own terminology how should we interpret the market's post-hoc rationalizations if it has got it wrong? When will we know whether they have got it right/wrong? Will we know after they crash or after they require another massive injection of liquidity?
And how do we square these doubts with the notion that markets are always right, through their discounting acumen, at the time that such judgments are made?
To coin a phrase from Alice - it is all very confusing.
I would classify Mr. Bond's opinion as that of a Through the Looking Glass Bull which is a species currently in the ascendancy - but which might eventually become extinct.
Just one final thought about the sagacity of markets and their discounting ability. If the bond vigilantes are taking the reflation scenario seriously (and as I have previously indicated, it is my belief that born again hedge fund re-flationists are really out to ambush the Fed's constructive stance towards equities) then they should be looking more at the end game for Quantitative Easing and beginning to discount the possibility of a less accommodative monetary policy. The next wave of market chatter could, under this interpretation, suddenly switch to mounting pressure on Mr. Bernanke to ease up on supplying endless liquidity at the long end of the curve and start paying more attention to the short end. If, on the other hand, major bond investors are demanding higher rates not so much because of fears of reflation but rather a perception that the risk of holding US Treasuries is increasing, then in hindsight the turbulence this week in long dated Treasuries and mortgage backed securities may have been more designed to express their displeasure at the tendency of governments and central banker's to bail out anything that wobbles.
Returning to Mr. Bond - if he is right - then the Fed will need to start sending signals about their exit strategy and dropping hints about short term rates - in which case he will be wrong.
I'm afraid I can't put it more clearly,' Alice replied very politely, `for I can't understand it myself to begin with; and being so many different sizes in a day is very confusing.'But for Dr. Bernanke it's less a terrain of make-believe and more a minefield of gotchas.
Surely Fed chairman have always been subject to this conundrum? What makes it different this time is that for years to come trillions of dollars of IOU's need to be sold in a market that's already drowning in an ocean of government debt. Further aggravating the scenario is that Treasury forecasts are based on servicing that debt through a combination of rising incomes and/or low interest rates.
I'm sure Mr. Bond or one of his colleagues will figure out how to spin record foreclosures, slumping real estate and escalating unemployment levels.
The near term direction of US equity indices remains an enigma wrapped in a mystery to me and I can be easily persuaded that there is a major vacuum below current levels on the one hand, or by plausible arguments that in the algorithmic trading domain that predominates - the rotation strategies are currently showing a tilt towards rally continuation.
As we have seen consumer confidence numbers respond very positively to higher equity prices and one must assume that that is a major strategic objective of the relevant interest groups.
The S&P 400 Midcap index reveals that an overhead barrier has contained prices since early May and that there is a sideways pattern following the violation of the very steep uptrend line through the lows. It seems that the bears are having difficulties gaining traction so it is conceivable that a decisive break up to the 200 day EMA could bring even more of the long only fund managers who are falling behind back into the game.
If government bond jitters turn more serious – say, if some auctions fail or there is serious political instability – it is entirely possible to imagine a far darker scenario, in which faith collapses in government finance. If that occurs, we would face both currency upheaval and more bank turmoil, as investors lost confidence that the state can keep propping up the banks.
It is rather disquieting that the financial house of cards now rests, as she suggests, on the continuing faith in government finance. All of it underlines the need to keep close watch of how well government auctions are going and how much Q.E. fire-power is being allocated for smoothing over the bumps along the way.
On an historical note it may be worth remembering the oft quoted remark from Walter Wriston, a former chief at Citibank as it was then known in the 1980's. Wriston, stated confidently in 1982 that: "Countries don't go broke". Shortly after his statement, Mexico, Brazil and Argentina defaulted inflicting near mortal losses on Citibank. (I am grateful to Satyajit Das for this anecdote)
All three states are possible sovereign default cases and a graphic in the Danske Bank report shows the alarming drop off in retail sales year on year including 25% drops for Latvia and Estonia.
Two sections of the report are worth quoting
The event risk has risen sharply in the Baltic markets and we advise utmost caution.As noted here recently in regard to other potentially unpleasant possibilities, one cannot but wonder how much the capital markets have "discounted" the possibility of an EU member state defaulting.
Yesterday, the Swedish central bank Riksbanken said it will increase its currency reserve by SEK 100 bn through a loan from the Swedish debt agency. Investors seem to believe that this is a buffer to deal with potential problems arising from the Baltic crisis.
With worries over the Baltic situation on the rise there is a significant risk of negative spill-over to other markets in CEE. Therefore we see clear downside risk on the CEE currencies and a risk of a sharp sell-off in the CEE fixed income markets in the coming days. We especially see value in buying USD/HUF,(Hungarian Forint) but potentially also USD/PLN (Polish zloty) on an escalation of the Baltic crisis.
Thursday, 28 May 2009
NEW YORK (MarketWatch) -- J.P. Morgan Chase's Chief Executive Jamie Dimon said on Wednesday that he expects the firm's credit card losses, excluding business acquired from Washington Mutual, to be about 9% in the next quarter.It seems as though traders/investors are pretty unfazed by the the admission that up to 1 in 4 WaMu credit card holders may default. It must be just another wrinkle in the consumer de-leveraging story that the markets have already discounted and which the stress tests already anticipated.
In remarks prepared for delivery at a Sanford Bernstein conference later today, Dimon also said that Washington Mutual credit card losses are expected to be between 18% and 24% by the end of the year.
By the same reasoning it also appears that the markets are not surprised by this item either:
NEW YORK (AP) -- A record 12 percent of homeowners with a mortgage are behind on their payments or in foreclosure as the housing crisis spreads to borrowers with good credit. And the wave of foreclosures isn't expected to crest until the end of next year, the Mortgage Bankers Association said Thursday.
The foreclosure rate on prime fixed-rate loans doubled in the last year, and now represents the largest share of new foreclosures. Nearly 6 percent of fixed-rate mortgages to borrowers with good credit were in the foreclosure process.
Should we be worried about the magnitude of these record breaking credit card losses and foreclosures? Apparently not, according to the experts. They are lagging indicators it seems and not like consumer confidence which is a leading indicator based as it is on higher equity prices. And traders in equities have already discounted all of the grim news about the de-leveraging of consumers. Haven't they?
Wednesday, 27 May 2009
There is an excellent piece by Brett Steenbarger on the extent to which algorithmic trading is creating herding behavior in the equity markets with the TILT button currently in rally mode. But presumably the tilt bias could change to sell mode in a nano-second.
Perhaps more ominous is another specialist's view of the steepening of the yield curve and its possible ramifications.
The yield curve is losing its curve and is about to go perpendicular. The 2 year/30 year spread is closing the day at 356 basis points. I have recounted many times here that the widest level for that spread since man has walked erect was at 369 basis points in October 1992. The yields were 3.60 and 7.29 percent, respectively.As I wrote earlier , it is my own view that we are entering an Extreme Hazard Zone, so be sure to bring your crash helmet.
Look at the breakeven spread on the 10 year TIPS bond. That spread is currently 185 basis points. I do not believe that we have been that wide since the advent of the financial crisis in 2007. I think that investors are uttering a gigantic and collective nyet regarding the implementation of monetary policy and fiscal policy in the US.That is why the curve is steepening so dramatically.
Foreign central banks continue to intervene, buying dollars and selling their local currencies. The names most mentioned in that endeavor are Russia and Brazil. Sources tell me that the fruits of the intervention are parked in 2 year notes and 3 year notes. There is a dearth of central bank interest in the longer maturities.
Maybe the final climactic event is upon us. Maybe the final bubble to burst is the US Treasury market and maybe we are on the verge of a financial Krakatoa which will realign financial markets.
Whatever the case it feels like the calm before the storm and we are about to embark on another interesting expedition.
My sense is that to the extent that the crisis has been rationalized as episodic and the consensus view is that we're now back to business as usual, we will not have learned any important lessons or implemented the necessary changes.
Ultimately it may be better that a series of piecemeal and token changes have not been enacted as it has probably shortened the time frame up to the next crisis. When that does come it will require disruptive structural change and the emergence of a truly more transparent financial and political culture.
If one is a believer in the ultimate wisdom of markets, then one has to hope that they will eventually discover more rational pricing mechanisms for resource utilization and risk assessment based on a proper evaluation of external costs and unintended consequences.
This is the message that we should be paying attention to as we will (hopefully sooner rather than later) have to confront the continued degradation of the ecosystem, the dis-enchantment of electorates (which is approaching complete in countries like the UK), the conundrum of quantitative easing and the unsustainable nature of a private gain/public pain system of accountability.
If foreign investors are moving away from the dollar and into commodities, they will give the U.S. economy one additional obstacle in its struggle towards recovery. Not only must we contend with deleveraging from the consumer side, in the form of banks still refusing to lend, but now we face higher interest rates, which will affect mortgages, and higher energy prices, which restrain economic activity.I agree with the author that there is a "vicious circle" at work and in fact I see it even more grimly in the form of a double-bind which can lead to a pathological condition. But this won't stop those traders, who have figured out the nature of the bind, gyrating the market in a desperate battle of wits with the Fed who will be attempting to prove, with a lot to play for, that they are wrong.
However, there is a risk. If the Fed finds it must ramp up its bond purchases, it will lead to more dollars being pumped into the financial system. That, in turn, will give investors even more reason to sell them. The result would be a vicious circle.
Business as usual? Not likely given the magnitude of public sector largesse .
Eventually, and it could take a while, this will be an extreme hazard zone and the wearing of crash helmets is strongly advised.
Somewhat anticipated by this album cover from the 1970's - an era much like our own - which for those who don't know the album is called Crisis. What Crisis?
Instead of increased confidence leading to greater appetite for equities it is exactly the converse.
Alice would have been delighted.
The Fed cannot afford to turn a blind eye to the Treasury market and the dollar – so if it comes down to a hard choice it will be a case of managing the news flow to create another flight to quality.
The markets will not let up on testing this until they get a clearer signal from the Fed that the time to keep propping up equities has come and gone.
Apart from the obvious desire to get headlines with this remark, when one stops and thinks about the US dollar being vulnerable to a similar kind of trashing as the Zimbabwean dollar, it seems to be the ultimate in sophistry and equivocation to add the qualification that it will almost approach that of Mugabe's regime. If the US dollar is going to collapse, and let's hope it doesn't happen, there will be little purpose in econometricians trying to measure the extent of the collapse to two decimal places. A collapse in the global reserve currency would be a systemic collapse, and unlike recent bailouts for vulnerable banks, if the US Treasury and Federal Reserve start wobbling uncontrollably, it is hard to imagine who will come to its rescue
My contention is that hyper-inflation is not susceptible to classification or calibration in terms of precise orders of magnitude. Even academic economists can fall victim to this fallacy as illustrated in this quote from Steven Hanke Senior Fellow at the Cato Institute and Professor of Economics at Johns Hopkins University.
Zimbabwe is the first country in the 21st century to hyper-inflate. In February 2007, Zimbabwe’s inflation rate topped 50% per month, the minimum rate required to qualify as a hyperinflation (50% per month is equal to a 12,875% per year). Since then, inflation has soared.The last sentence from the distinguished professor seems laughably redundant.
Tuesday, 26 May 2009
Even in a less extreme form, if we substitute the words "minimal risk" for "risk-less" use of capital in the above, the returns achievable from certain kinds of arbitrage-like financial transactions have been powerful inducements for investment banks and other financial intermediaries to explore new areas of financial technology.
But do such opportunities for a free lunch or at least a very inexpensive one really exist? Furthermore, in what sense is innovation in finance a value added activity? With the activities of the financial sector contributing such a large proportion of national income this question takes on considerable significance as another associated question arises as well.
Did the underestimation of the inherent risks in complex financial products and financial innovation lead to greater risk taking by the financial services industry which culminated in the great meltdown seen in the fall of 2008?
This appears to be the underlying assumption of a thoughtful article by Rortybomb.
we should think of our financial sector as something that can’t create a lot of value without taking on more risk. So whenever I hear someone pitch an idea for a way to “innovate” the financial market, I ask him “what makes you think that you are smarter than the entirety of the financial market? Are you smarter than everyone at DE Shaw?” It is possible, of course. But I approach it as if someone has told me they found a certain way to beat the casino at cards without cheating; one needs to make sure that better returns are just the result of hiding away the risk from where people can see it.A case could be made that the value added component from any innovation in finance or technology is very simply the novelty itself. In a culture of aspiration that needs to be stimulated with new memes and motivations - to kindle the animal spirits - there is a positive virtue in allowing innovators to innovate. If one places a value on the aspirational element of our global economy, the benefits of a cultural sense of direction and progress are of inestimable value. But how do we reconcile that benefit with the undoubted costs that the economy and culture are having to suffer as the result of the private gain/public pain asymmetry which seems also to be a foundation stone of that same culture of collective aspiration?
Might there be some pricing mechanism for determining the external or hidden system risk costs which will often accompany innovative financial transactions and which should then be levied as a tax payable to a global depository at the time such transactions are entered into?
The levying of a derivatives insurance tax in all instances where there exists a counter-party risk of sufficient magnitude above a threshold amount would then provide an insurance fund or safety net to cover the systemic accidents when they arise.
Rather than having to rely on the public sector to continually bail out those guilty of inevitable mis-calculations, the external costs - just like the costs levied to cover eco-system damage by polluters - could become the security blanket required to protect the collective purse from the flipside of the benefits of innovative finance.
This I believe is the view being advocated by Andrew Lo from MIT in the following which appeared recently in the Financial Times.
There is a very appealing and equitable logic to Lo's suggestions and I have previously discussed the alarming consequences of failing to properly factor in the true external costs of the credit creation process which has lead to its persistent under-pricing. One can but hope - in the context of our culture of aspiration - that Lo, or one of his followers, is able to successfully provide a more detailed implementation framework and pricing basis for calculating the true costs, surface and external, for the use of innovative financial products and credit agreements in general.
Thursday, 21 May 2009
The Daily Telegraph which has been drip feeding these revelations has this nugget today
I wonder if Sir Peter's ducks are claiming to be non-domiciles as a result of their offshore status.
Sir Peter, the MP for Gosport in Hampshire, submitted an invoice for a “Stockholm” duck house to the Commons fees office, claiming £1,645 as part of his MP's expenses claims.
The floating structure, which is almost 5ft high and is designed to provide protection for the birds, is based on an 18th-century building in Sweden. The receipt, from a firm specialising in bird pavilions, said: “Price includes three anchor blocks, duck house and island.”
It was announced on Wednesday that following The Daily Telegraph’s disclosures, Sir Peter will retire at the next election.
Sir Peter became the third veteran Tory MP to announce he will quit over expenses claims, after his second home gardening bills were among the latest claims to be published by The Daily Telegraph.
This morning, David Cameron said the claims by Sir Peter would now go before a scrutiny panel to determine how much money he should pay back.
"I spoke to him last night and I said you are going to announce immediately your retirement or I will remove the Conservative whip and he has announced immediately his retirement," he told GMTV.
His expenses files reveal that he was paid more than £30,000 of taxpayers’ money for “gardening” over three years, including nearly £500 for 28 tons of manure.
Not even the script-writers for the Monty Python series could have made this one up.
Wednesday, 20 May 2009
However "smart" traders are learning to use strategies in which they will only benefit from those who fall for such traps on a continuing basis.
Spelling this out a little more in the context of the performance of the markets today (May 20th 2009) there is a conflict between the green shoots narrative necessary for the refinancing of the banks scenario (Bank of America (BAC) sold $10 billion plus in new equity) and the reflation trade.
In order to ensure the success of the re-financing of systemically important banks certain market constituencies are pushing equity indices to key resistance levels based upon the narrative that the worst is behind us in terms of financial meltdown, Armageddon etc.
At the same time, however, other traders are selling the US Dollar, buying commodities and in general engaging in the reflation trade and thereby posing a real problem to the benign inflation scenario upon which the solution to an ever increasing debt/GDP problem is based i.e. manageable long term interest rates.
Increasingly the "double bind traders" are playing the following reflation game.
Long S&P 500, Long Emerging Markets, Long Crude Oil Futures, Long Commodities in general and especially gold and the gold Miners, short the US dollar - especially by being long the commodity currencies - Canadian and Aussie dollar (and to some extent sterling) with a short bias towards Treasuries.
At critical inflection points, primarily detectable from monitoring the spikes in equity indices, the reflation traders will have very profitable positions in the reflation trades and will be able to recycle the profits made from those trades into financing short equity index positions and, after a suitable time delay, going long Treasuries.
Needless to say this trade is eminently repeatable, and the really vicious part of the double bind is that ultimately the reflation traders are playing with the market's own money.
Tuesday, 19 May 2009
Improved sentiment and stock prices in the banking sector, not surprising given the host of rescue measures provided by most governments - including public sector guarantees against losses (in the case of the UK) and changes to the way that banks have to mark assets (in the case of the US)- is producing the desired effect as bombed out banking stocks are at last showing encouraging signs of those illustrious "green shoots" (I'm talking about the stocks and not the underlying financial health of these banks)
The UK government, which over the last several months had to more or less nationalize several banks - most notably RBS and Lloyds TSB - is anxious to start "distributing" (unloading) some of the assets that they have been "warehousing" during the recent difficulties. The cosmetically refurbished and (slightly) less fragile looking properties are about to be paraded on the capital markets' "catwalk" and clearly there is a hope that they might catch the eye of sovereign wealth funds who are still wallowing in liquidity.
According to this report the body empowered to oversee the public sector's holding s in the banks - UK Financial Investments (UKFI) - is reportedly already talking to sovereign wealth funds and other potential investors about selling stakes. The article claims that:
UKFI, which manages the taxpayer’s 43 per cent stake in Lloyds banking group and its 70 per cent stake in Royal Bank of Scotland, is reportedly sounding out potential investors so that it can begin offloading its stakes within a year.
It is not thought likely that the organisation could sell its investments entirely within a year, but rather it would look at a gradual exit phased over some time.
It strikes me that the timing seems a little too anxious and that if the UK government had great confidence in the value of its holdings - as its budget forecasts indicate an economy growing at 3% plus in about 18 months time - why wouldn't they be a little more patient and wait for the stocks of RBS and LloydsTSB to improve even further.
It could just be a coincidence that Gordon Brown- suffering from historically poor opinion poll ratings - is hoping to show that the government rescue was well conceived and that the fact that private sector players are "showing interest" in buying positions from the government vindicates his economic policy. He has not proven to be great at market timing in the past however as he sold most of the UK's holdings of gold about ten years ago when the price of the metal was below $300 an ounce.
One also has to suspect that the sovereign wealth funds may be quite keen to know whether the underlying guarantees against losses incurred by the partly nationalized banks from their holdings of "legacy assets" will remain in full force and effect should they desire to participate in the ownership of these re-habilitating banks. Somehow I suspect that that issue will be at the top of the agenda for any of the smarter managers of the sovereign wealth funds.
Sunday, 17 May 2009
The general point to be made in this regard, and it goes to the heart of the fallibility of having the public sector so immersed in dealing with the financial crisis, is that this type of mis-alignment of interests is a variation on the Tragedy of the Commons issue.
U.S. Treasury officials' incentives are not as well aligned with the interests of taxpayers as bank managers' incentives are aligned with the interests of their shareholders.
Treasury officials should be negotiating to get better deals for the US taxpayer and are ultimately accountable to everyone (apart from those who use Swiss bank accounts). However the paradox or tragic irony is - and this is yet another example of the Looking Glass world we are entering - that when something (including accountability) belongs to everyone, it essentially belongs to no-one.
Sometimes the system just has to be shut down and the computer has to be re-booted.
Why can't we do the same with the financial system which clearly is dysfunctional and has its own and more reprehensible type of corruption at the root of the problem?
The financial system is populated by human beings with emotions who are immersed in a culture of memes, aspirations, fears and illogicality. There is no cultural equivalent to a System Reset button.
Why is this important?
The important elements of market liquidity are not susceptible to quantification and are not in fact part of the domain of financial economics. At its core market liquidity is deeply cultural and qualitative. After a major loss of confidence such as was seen in 2008 - systemic liquidity becomes almost non-existent. Markets have to be "tricked" into believing that there is liquidity and through this sleight of hand hopefully the adversarial and fractious nature of human economic activity - what Keynes called the animal spirits - will re-appear leading to trading and investing based on enduring differences in value perceptions by different market constituencies. Only when this genuinely manifests itself will asset destruction and income disappearance be arrested.
The 1930's failed to deliver such a re-generation and the adversarial and fractious mindset required to lift the world from a Depression (far more a psychological and cultural term than an economic one) shifted to a different arena - ideological conflict and the loss of millions of lives.
Why is it very important that a genuine belief in the integrity of markets and widespread participation within them returns?
Doctor Johnson wrote a man is seldom so innocently employed as in the making of money
Saturday, 16 May 2009
The dependence of exporting economies on a robust and voracious consumerist culture is highlighted by the dramatic slumps being seen for Japanese manufacturers and other Asian economies. The following was reported on Friday in the FT on the hit being taken in Hong Kong:
Hong Kong’s economy contracted at the fastest rate since the Asian financial crisis in the first three months of this year as exports passing through the territory saw their biggest drop in more than half a century.
The government on Friday predicted gross domestic product would contract by up to 6.5 per cent this year, after announcing the economy had shrunk at an annual rate of 4.3 per cent in the first quarter of 2009.
Equally depressing was the news this week from Europe - where Germany, the workshop of the EU, is seeing the largest drop in GDP since records began in 1970.
The rapidly deteriorating position of the Eurozone economies is discussed in this article
Germany's economy shrank by 3.8pc in the first three months of the year - a record contraction that is almost double the fall of Britain's gross domestic product in the first quarter. The figures sparked attacks on Germany's government, which has repeatedly shown reluctance to bail out either its economy or financial system.The article also includes the ominous warning from the IMF that more financial shocks may lie ahead.
In figures described by economists as "disastrous", Eurostat also reported that Italy shrank by 2.4pc, Austria and the Netherlands by 2.8pc, Spain by 1.8pc and France by 1.2pc.
Within hours, the managing director of the International Monetary Fund (IMF) warned that the global recession is far from over and that people must prepare themselves for more financial shocks. Dominique Strauss-Kahn said the world remains in the grips of a "Great Recession" and played down talk of "green shoots".
Wall Street practitioners realized many years ago, that the appetite for stocks, especially on the part of the "general public" was in fact in contradistinction to this simple economic theory.
When Wall Street wants to hold a sale it puts its prices up.
The above is what I shall call the Enigmatic Markets Hypothesis or EMH - not to be confused at all with an alternative theory about how markets work with the same acronym. I hope the reader will indulge me the following rather cynical explanation of how this works, in general, and whether it can be relied upon to work in today's more stressed financial environment.
When markets are in the doldrums, the first phase of the EMH arises from the so-called "smart money" buying at lower prices and by steadily increasing their bids until eventually broader constituencies within the market become ever more receptive to the notion that this is a good time to start buying stocks. This positive feedback loop then begins to take on a momentum of its own creating a nicely circular and increasing enthusiasm for stocks.
A lot of the techniques that are deployed in support of the 21st century version of the EMH involve one group of asset warehouse/market makers engaged in relative value and sector rotation strategies with other groups of asset warehouse/market makers to provide the appearance of liquidity and a general and sustained uplift to the most visible and widely reported barometers of the appeal of stocks - the daily reports of increases in the Dow Jones Industrials Average and the S&P 500.
In terms of the larger goal of the EMH, the market makers are, of course, ultimately not in this to "distribute" to each other - but on a short term basis the movement back and forth through algorithmic trading maneuvers is what creates the chimera of a positive and liquid market - a nicely combustible mixture. The next phase of the EMH requires the contribution of talking heads, ranging from Wall Street analysts to freelance bloggers and traders talking up their books . The spark to get the party started again is then usually provided by the more congenitally optimistic as well as the well paid touts in the financial media who begin to talk about green shoots and a nascent bull market.
Even more reminiscent of Alice Though the Looking Glass is that the different warehousing specialists could just as easily be within the same firm and on the same trading desks performing their sleight of hand through the wonders of financial engineering. Algorithmic stratagems are constantly re-calibrating long/short ratios and other arcane portfolio management strategies to ensure that while the overall trend of the market is upwards - designed to captivate the attention of the "average investor" and engage him or her with a fresh enchantment for the markets - this is the EMH temptress - the degree to which the movement of price reflects any genuine accumulation of equities is back firmly in the peculiar world created for Alice by the febrile imagination of Lewis Carroll.
At this point the baton is passed to the popular media who, seduced by the temptress (or at least under instructions to be so seduced by their proprietors) take over the narrative with headlines in the mainstream press and broadcast media about exciting percentage increases in stock prices and great prospects for further increases - the general public's appetite to get on board and enjoy the ride up in prices provides the liquidity necessary for the smart money to begin the process of distributing the stock that they have been "warehousing" at lower levels to those whose motivations to buy even more stocks are driven by even higher prices.
Just as an aside it's worth recalling that, owing to the recent capital market "difficulties" the carrying of inventories and the warehousing of them is essentially risk less to the major market makers and comes with minimal financing costs courtesy of the vast array of government programs and safety nets.
I have two cautionary concerns on whether the type of "asset marketing" which lies at the heart of the EMH being practiced by the big inventory/warehousing players - Goldman Sachs (GS), Morgan Stanley (MS), etc- will continue to work in the current environment.
1. Large sections of the general public are now permanently "out of the market" and given current levels of indebtedness, anxiety and outright suspicion of the integrity of the institutional framework surrounding markets - they are likely to remain out of the market for the forseeable future. Collective investment vehicles for the general public, mutual fund managers and pension fund managers, are not sitting on huge amounts of cash with a steady inflow of new funds to deploy in the market. Parenthetically I would suggest that it is not fundamental to the reservations being expressed here whether there is a huge surplus of cash on the sidelines - all part of the bullish narrative - or not. According to this recent article a graphic illustrates that according to the author:
Cash as a proportion of mutual fund assets has never been lower2. The current market feels as though it is critically poised in regard to the recent EMH campaign and the suspicion is that there are not enough punters prepared to succumb to the temptation to take a chance again. If "average investors" are not being enticed back into this market in droves because of widely based, cultural disaffection with equities, then those very same EMH strategies which have been exhibiting an upward tilt - as the appearance is being created that risk appetite is replacing risk aversion - may now be starting to develop a downward tilt as the sector rotation dynamics, which are at their core, revert back to a more defensive posture. Even though the market makers have their inventories well protected on the downside they don't really want to be seen to be holding some really dodgy stuff when the music stops playing again.
If the recent rally in equities is running out of steam, this will surely bring into focus again questions about how much patience those who are holding equity positions in the large inventory/warehousing merchants, will have as they contemplate how long it will take before another ramp up of EMH, perhaps requiring further embellishment of the financial cosmetics, regains its traditional allure.
Friday, 15 May 2009
The author considers how the cost of "things" has actually been far less relevant to the current crisis being faced by middle-class Americans than the cost of "quality of life" issues such as the neighborhood that one inhabits in order to to qualify for good schooling for one's children and the cost of health care, both of which in historical terms have risen far more dramatically in comparison to (say) the cost of dishwashers, PC's and food.
For many middle class Americans (and residents of other G7 economies) the real trap has been the need to maintain the income required to support their aspirations for these "quality of life" issues and the fact that they allowed their savings rate to decline to zero based upon a mis-perception of their susceptibility to loss of income from unemployment or their false sense of security and the asset side of their personal balance sheets from unrealistic assumptions about the value of their real estate.
The availability of "cheap" credit, with very relaxed standards of qualification, enabled many to stretch their lifestyles to afford what they considered the norms required for the education of their children and adequate health care. The "trap" that was laid for a culture of aspiration - the over-use of easy credit to pay for these aspirational "goods" - was the engine that enabled the financial services industry to expand as rapidly as it did during the last 20 years so that the sector became equal to about 40% of total national income in the US (and similar levels in the UK).
The author of the article draws attention to the fact that the over-use of easy credit has led to a situation where the US with only 4% of the world's population is consuming about 25% of the world's resources and this has been largely motivated - in my opinion - by the dynamics of the aspirational mindset which was facilitated by easy credit.
When the author says that we should be
....concerned about how wasteful we are with our gasoline consumption and meat production (neither priced anywhere near their externality cost)."it is hard to disagree that the true economic cost has been massively under-estimated because of the failure of traditional costing analysis to incorporate the external costs to the planet Earth from reliance on fossil fuels etc.
But the essential point that I would maintain is that the principal reason why the US, and many other economies, are now faced with such a grim financial position is that the "external" costs of credit were also massively under-estimated.
The trillions of dollars which have been required from the public sector balance sheet to under-write the integrity of the banking/credit system are just part of these external costs. The not so readily quantifiable costs of human misery, bankruptcies and loss of homes, break-up of families and childhood suffering are far more substantial.
As a culture of aspiration we deluded ourselves into thinking that credit was cheap. Especially in the arithmetic that underpinned mortgage related securitization we got it colossally wrong.
Wednesday, 6 May 2009
What will be the overall impact of tomorrow’s stress tests announcements on understanding of our overall economic and financial situation? To paraphrase slightly Larry Summers’ smiling response to a question (actually on the future of Fannie and Freddie) after his recent speech at the Inter-American Development Bank, “if you think that was a clear answer, you weren’t paying close enough attention.”
While the Treasury and Fed believe that they can get away with this kind of answer (even if left implied rather than explicit), and more importantly the essential cynicism that it belies, one can rest assured that the financial elite believe that they can, through constructive ambiguity, prevent a systemic financial meltdown.
Not quite sure how, if at all, this fits in to this but one memorable quotation from Neils Bohr, the Danish physicist, comes to mind.
Anyone who is not shocked by quantum theory has not understood a single word.
It would be great to hear from anyone who feels suitably inspired to connect the dots (assuming there are any).
The first reports were greeted with a bout of selling in the pre-market and lots of earnest bloggers ready to tell their followers that maybe Armageddon was back on the agenda. After some further percolations through the blogosphere and CNBC etc. it now appears that the news is a positive for BAC as they already have raised most of the capital they need - and through a wonderful sleight of hand involving the way that Tangible Common Equity (TCE) is actually measured - the stock is now moving up.
Confusing... that was the whole point.
The essence of such first class spin is that the signal/noise ratio is calibrated to create the maximum ambiguity. Then the markets are tricked into believing that they have not, in fact, already discounted the news appropriately.
Whether they then go on to discount it appropriately is a different matter and can take a lot longer to manifest itself.
The big concern of course is whether those doing the spinning are as clever as they appear and whether they really know what's going on.
Monday, 4 May 2009
This single fact from a piece in the New York Times highlights why this issue has moved towards the top of the agenda rather than being a back burner issue.
American multinational corporations paid only $16 billion in U.S. tax on $700 billion in foreign earnings — an effective tax rate of 2.3 percent -- in 2004, the most recent year for which data are available, according to the White House. A fact sheet said that nearly one-third of all foreign profits reported by such corporations in 2003 came from three small low-tax countries: Bermuda, the Netherlands and Ireland.Reading this list reminded me of my days in the entertainment industry when nearly all deals involving licenses of copyrights used the Dutch sandwich structure. For those not familiar with them they involve using tax treaties between the Netherlands and most other major jurisdictions and back to back arrangements with companies (usually letter box companies) in the Dutch Antilles. If you want to know more you should consult a good international tax attorney.
It will be interesting to see whether these types of structures which are still widespread are going to have to be recast. Somehow I doubt it.
The fascination with the Sage of Omaha and the AGM for Berkshire Hathaway seems to have led to more media activity this year than I can ever recall. Unfortunately a lot of the media commentary seems to be of the kind that is completely lacking in real content but reported because they are the utterances of "the greatest investor of all time" - in other words if anyone else had said them they would have been considered so humdrum as not worthy of attention.
The following brief extract from a blogger that I follow - Mish Shedlock - captures the essentially "vested interest" nature of some of Mr. Buffet's thoughts about the current environment.
Buffett, in his most recent letter to shareholders in February, said he supported the U.S. government actions, while predicting bailouts will cause “unwelcome after-effects” including inflation.It's hard to disagree with that straightforward conclusion as to the motivation behind the sage's self-serving rhetoric.
Of course Buffet supports the bailouts. So does PIMCO and so does anyone holding corporate bonds of financial institutions in general. They stand to benefit from these taxpayer sponsored bailouts. It's as simple as that.
BRUSSELS (AP) -- The European Union says Europe faces a "deep and widespread recession" and that unemployment will rise sharply over the coming two years.
It says both the 27-nation EU and the 16 countries that use the euro currency will shrink 4 percent this year, way more than its previous forecasts.
It says some 8.5 million jobs will disappear in the EU in 2009 and 2010, more than wiping out the number of new jobs created in the last two years.
It predicts a subdued recovery next year but only if the banking sector and world trade start to recover.The EU says Germany's economy will contract 5.5 percent this year, Britain and Italy will shrink by between 4 percent to 4.5 percent, while Spain and France will post a 3-percent drop.
London had the distinctions of being rated as the dirtiest and most expensive city in Europe but also the city having the best free public attractions and the best night life.
According to this article from Sky News
It was also seen as the most expensive city on the continent and as having the most tourist traps and the worst-dressed locals.Also worth noting was the following which emerged from a survey which polled 2,376 European travellers and was carried out by the TripAdvisor company.
But on the plus side, the UK capital was thought to have the best free attractions, the best public parks and the best nightlife.
Some 36% of travellers who were polled reckoned London was the dirtiest European city - well ahead of Paris in second place with 9%.
The cleanest city was considered to be Copenhagen, while the best bargain city was Prague, the friendliest was Dublin and the most boring was Brussels.
Half of those polled rated London best for public parks, with Paris a distant second with just 7%.
Paris had the best-dressed locals and the best cuisine, but was easily the least-friendly city and also the most over-rated.
The French capital lost out to Venice as the most romantic city while Warsaw had the ugliest architecture.
Sunday, 3 May 2009
These are Big Questions and the fact that many are beginning to ask them is, I believe, a good omen for the future of our financial architecture. There are some not so constructive and ultimately destructive strands to the debate, and some of the tone of the discussion, in some ways perfectly understandable, may be nothing more than an angry resurgence of libertarianism in reaction to the horrendous stupidity of the financial technocracy and the blatant examples of Wall Street/Washington cronyism.
For those who have something else to do today after browsing the web for an hour or so they can take relief from the fact that I do not want to tackle the issue of replacing the Fed or other central banks head on in this article – I shall leave that for another occasion. However I will simply declare my hand by pointing out that with interest rates effectively at zero around the globe and with the main strategy advocated by the financial technocracy for "solving" almost every financial miscalculation or "accident" being to shovel ever more generous sums from our - apparently - limitless inter-generational future wealth at them, it does seem hard to find a rationale for all of the elaborate Fed machinery. Day to day open market operations are one thing but in terms of the FOMC the default mode for policy making with regard to the financial sector seems to be - If in doubt bail them out.
The question that I want to touch on - and at this stage it really is no more than like a butterfly touching down for a few seconds - is the possibility that de-centralized network dynamics might be expected to emerge that could provide for a far more versatile and less fragile risk management capability than we have today.
Bottom-up, self-organizing forces within distributed networks as a new way to organize the financial world and political system are memes that are still in their infancy. But there are some instances that one can point to of this emergence, including the manner in which Barack Obama was able to mobilize grassroots support via the internet and social networking paradigm and defeat the old style political machinery-big interest group model of the Clintons. I would suggest that this simple case study lends plausibility to the notion that it may not be too distant in our future that a replacement model could start to emerge that would reveal just how outmoded our current highly centralized and oligarchical financial structures are.
A distributed architecture with much less power at the center, and a looser association of the nodes of the network without over-optimization would provide, in the opinion of this author, the foundations for a framework and topology for a financial system which would be more transparent, less fragile and more equitable.
Turning to another dimension enables us to examine some of the cultural and personality issues that can arise in the debate about centralized versus de-centralized modes of organization. To put things rather crudely, some personalities are authoritarian and sometimes described as “control freaks” – these tend to be people who have a low tolerance for risk – and there are others who are more culturally adventurous who are willing to live with less “certainty” and have more confidence and belief that order will emerge from the apparent chaos of multifarious social and economic interactions.
On this topic there is an interesting and thoughtful piece by John Naughton in the London Observer newspaper for Sunday May 3, 2009.
The author of the column contrasts the two mindsets that I have touched upon and makes the following very illuminating comparison
The cultural agoraphobia from which most of us suffer leads us always to over-emphasize the downsides of openness and lack of central control, and to overvalue the virtues of order and authority. And that is what is rendering us incapable of harnessing the potential benefits of networked technology. Industries and governments are wasting incalculable amounts of money and energy in Canute-like resistance to the oncoming wave when what they should be doing is figuring out ways to ride it.
To further demonstrate the point being made above the writer contrasts the manner in which the French government created the Minitel network in the 1990’s – a predecessor to the World Wide Web. Most homes in France had a terminal connected to the Minitel network which was organized by the French government with centrally selected content and channels of information. This would represent the top down form of network organization par excellence .
On the contrary the DARPA system which was used as the basis for the much more loosely connected – from an organizational point of view- internet and the World Wide Web which also came to prominence during the 1990’s became the bottom up publishing platform upon which – to quote from Naughton – “anybody can publish anything - including lies, propaganda and pornography - with no prior approval”.
In a related context it is also possible to make the contrast between the way that the Encyclopaedia Brittanica is published with rigid editorial and source-checking protocols as opposed to the more anarchistic way in which the Wikipedia is evolving.
While “the control freaks” would prefer to use Brittanica rather than Wikipedia there can surely be little dispute as to which is becoming the de facto standard for a new generation of information consumers used to viral networking, collaborative and constantly evolving documents as well as an innate distrust of top down authority figures.
What some are looking for to replace the corrupt Washington/Wall Street consensus and the power of the financial oligarchs at the center, is something which is much more like the World Wide Web than the French government's Minitel. It is taking the technological and open source model that was primarily innovated within what might loosely be called the Anglo-Saxon cultural tradition but, at the same time, resisting the tendencies within that same cultural mindset to seek to dominate and control. If the financial elite fail to recognize the fallacy of seeking such control they will ultimately come to the same realization as King Canute.
Saturday, 2 May 2009
WASHINGTON -- China, wary of the troubled U.S. economy, has already “canceled America's credit card” by cutting down purchases of debt, a U.S. congressman said Thursday.
China has the world's largest foreign reserves, believed to be mostly in dollars, along with around US$800 billion in U.S. Treasury bonds, more than any other country. But Treasury Department data shows that investors in China have sharply curtailed their purchases of bonds in January and February.
Representative Mark Kirk, a member of the House Appropriations Committee and co-chair of a group of lawmakers promoting relations with Beijing, said China had “very legitimate” concerns about its investments.
“It would appear, quietly and with deference and politeness, that China has canceled America's credit card,” Kirk told the Committee of 100, a Chinese American group. “I'm not sure too many people on Capitol Hill realize that this is now happening,” he said.
The Republican lawmaker said that China was justified in concerns about returns from finance giants Fannie Mae and Freddie Mac, which were bailed out by the U.S. government due to the financial crisis.
Kirk said he was the first member of Congress to tour the Bureau of Public Debt, which trades bonds, and was alarmed at how much debt was being bought by the U.S. Federal Reserve due to absence of foreign investors.
“There will come a time where the lack of Chinese participation may have a significant impact,” Kirk said.
This just adds to my concerns expressed in this article about the fact that the Fed could be facing a No-Win scenario.
At the moment it's even more useful to be watching this because you will be in very good company as PIMCO, Blackrock and the other funds that were looking to make some easy money from Quantitative Easing are paying very close attention to the long end of the yield curve.
It is also the case that the Federal Reserve has to be very focused on long yields as they are showing a rather pronounced tendency to keep moving up on an almost daily basis. It is probably becoming quite disconcerting for Chairman Bernanke and the other governors as they contemplate how much longer they can keep selling the idea that they really do have some "control" over rates at the long end.
If, de facto , it becomes apparent that they don't have such control, it will become harder to maintain warm and cordial relations with the likes of Mr. Gross.
While all of this "smart money" is watching its vast holding of Treasuries rather anxiously a lot of other people's money - pension fund managers, mutual fund managers, insurance companies - appear to have spent the last several weeks, initially tip-toeing and now, jumping into SPY, QQQQ, along with a variety of ETF's and most notably of consumer discretionary (XLY) and technology (XLK) stocks. At least one has to assume that some institutional managers are - surely it can't only be Goldman Sachs (GS) and enthusiastic retail investors that are driving this rally.
So a real nasty split-personality market is developing where sentiment is improving because equities are going up (pleasantly circular too - until it isn't), but under the surface the ploy about how the Administration is going to prudently navigate the public finances through their current "difficulties" is looking more and more suspect. The rosy scenario of low inflation, gradual recovery and a supportive interest rate environment - which allows plenty of scope for all kinds of re-financings - looks to be on increasingly shaky ground as the right hand stroke of the "V" shape on the S&P 500's chart becomes ever more parabolic.
It may not yet be a pivotal moment yet for Dr. Bernanke with yields on the ten year note around 3.2% and the yield on the 30 year just above 4% but some key thresholds are going to be breached quite soon.
What does the Chairman have up his sleeve to try to stop the day to day back up in yields? What would make investors rush back into bonds and let Mr. Gross and his chums sleep better at night? In short, what can the Fed do to keep PIMCO etc. on-side to help out with the other rescue efforts which will be required?
Even if the Fed can't actually manipulate long end rates they can help to calibrate the tone of the equity market's perception of risk. The Federal Reserve is more than just the nation's central bank - it is Mission Control for the financial spin industry. A well timed comment from Dr. Bernanke here or a well placed announcement about some new initiative there, and before all of the other people's money can get back safely to the sidelines, risk aversion moves up the agenda rapidly with an ensuing rush into the "safety" of Treasuries and the S&P 500 has a 7 as its first digit again.
Surely the Administration wouldn't want to see stocks go down in a hurry again!
Well - er....no, but actually er...they could dust off the "irrational exuberance" mantra and talk about the need for a more "measured" market reaction to what are after all only the first signs of improving fundamentals. Not a difficult speech to write for a seasoned Fed professional.
The big problem facing the Fed is that, more than ever, it has too many constituencies, with different agendas, to please right now (including, amongst a very long list, the Chinese government) and their room for maneuver is getting more compromised as the debt grows and the need to keep an orderly market in Treasuries becomes critical
I made some related comments yesterday in relation to an article where the author concluded, that in the current market environment, the Fed faces a dilemma. As repeated below, my main contention in regard to the author's analysis is that it actually seriously under-estimates the challenges facing the Fed.
Actually it's worse than a dilemma in my opinion, and it would be better to see that, given the nature of the Fed's position, its efforts to craft a coherent and internally consistent policy and to communicate its intentions to the market, will place investors/traders in what is sometimes called a "double bind"We had better get used to this split personality dynamic because I suspect it's going to be with us for quite some time.
Wikipedia defines this term which has arisen in different areas of communication theory and psychology as follows:A double bind is... a situation in which successfully responding to one message means failing with the other and vice versa , so that the person will be automatically wrong regardless of response.People (Markets) confronted with communications that are of this nature are very often prone to behave in an abnormal and potentially pathological manner.
A manic-depressive market is probably the appropriate response to such a deeply conflicted policy.