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.

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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.

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

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).

Links – 2017.10.24

Light link day … mainly because I’m cannibalizing my links for another post.

• “France balks at reforms that will standardize banking rules”.  FT
• Potential scenarios for yields and EUR depending on ECB actions.  Bloomberg

Are the potential nominees that different?

The media seems to think that if Yellen is re-nominated as Fed Chair, stocks will skyrocket … but there’s probably not as much difference between potential Chairs as we think.

During a speech last week, Yellen acknowledged that even a little downturn, which would necessitate a few percentage points of easing under “normal” circumstances, could require additional use of “unconventional” monetary policy.  Obviously, this is true … if your main weapon is to lower rates, and rates are near zero, you have to find another weapon.

Links – 2017.10.23

Back from vacation … I don’t have anybody who regularly reads this blog, so I’m sure nobody noticed, but there we have it.  Act as if there are readers and maybe someday there will be.

Links for Monday:

• Monetary policy without a working theory of inflation.  Brookings Institute
• Venezuela’s Behind on Its Debt and Facing Two Huge Bond Payments. Bloomberg
• Easy money makes house-flipping popular again …  CNN
• Easy monetary policies continue in Japan as Abe re-elected.  FT
• “Optics matter more than policy for the president”.  Fox Business

Dr. Hyman Minsky

The financial press have gotten excited by comments out of the People’s Bank of China.  Zhou Xiaochuan, PBOC Governor, warned that household and corporate debt in China may be creeping too high in China, risking a “Minsky Moment” in which sectors of the economy face cash flow problems in servicing their debt (see Crisis, 2008 Financial).

Changing Return/Risk

According to EurekaHedge, Hedge Fund launches are down 30% from the 2015-2016 average.  Nobody should be surprised by this … with Central Banks buying every AAA security they can get their hands on (less $50m per month in the US), investing gets pushed out the risk curve.  Pensions/401k providers can’t meet obligations with treasuries, so they move to muni bonds, and then to corporate bonds, and then to equities, and then to alternatives.  The greater the manager’s mandate for risk, the the more quickly he or she moves out that curve.