In early rules-based versus discretionary central banking debates, it was long ago recognized that discretion came with the risk of one misstep leading invariably to a series of only greater policy mistakes. This is the story of the contemporary Federal Reserve
The blistering IPO market is but one of the myriad late-cycle manifestations of Acute Monetary Disorder. For now, this fiasco is one hell of party
How might all this end? Increases in leverage (“securities Credit”) create a self-reinforcing liquidity dynamic, whereby speculation fuels higher securities prices, greater liquidity excess and only more feverish speculative zeal. The big problem is it doesn’t work in reverse.
It’s difficult to believe that Secretary Yellen will avoid having to contend with a historic financial and economic crisis. And Wall Street is quite comfortable that Yellen is precisely the right individual to work intimately with the Powell Fed to orchestrate whatever crisis response necessary to sustain the greatest Bubble in human history.
Covid’s precision-like timing was supernatural – nothing short of sinister.
Monday’s Pfizer announcement followed pivotal elections by only a few trading sessions – an election I have posited as the most hedged individual event ever. Markets were already in a state of acute instability prior to the news, having been spurred sharply higher by the unwind of hedges and short positions.
Those positioned bearishly had suffered only deeper impairment, while derivatives markets were moving toward dislocation. Holders of puts were in liquidation mode, while those that had written out-of-the-money call options (and similar derivatives) were facing rapidly escalating exposure. In the leveraged speculating community, the more sophisticated strategies were performing poorly. In particular, long/short strategy performance was suffering the effects of a brutal short squeeze along with violent rotations. A marketplace consumed with momentum was all Crowded together in the favored technology and “stay-at-home” stocks.
The Pfizer news showered gasoline upon the bonfire. It was a melt-up dislocation and short squeeze as intense as I’ve witnessed over recent decades. Segments of the market traded as if some hedge fund and sophisticated derivatives strategies were “blowing up”. As for long/short strategies, things went from bad to cataclysmic. From Bloomberg: “…Market winners and laggards switched positions at the fastest rate on record Monday.” Attacked savagely, the persecuted bears were hit with a fateful blow. A “bear” ETF lost 11% of its value in a chaotic Monday trading session.
Sure enough, such a market outcome “statistically never could happen.” In reality, such a freakish backdrop created a high likelihood of just this kind of mayhem and market dislocation (either up or down).
The prospect of a divided Washington would seem to take some pressure off the vulnerable Treasury market – and, through lower Treasury yields, corporate Credit more generally. And I appreciate that divided government has in the past worked to the advantage of the bull market status quo. But are we to believe in today’s crisis backdrop an irreconcilably split and hostile Washington will somehow function to the benefit of the markets and our nation?
Our nation is facing a dark and challenging winter.
Federal Reserve QE resolve has yet to be tested by either dollar or Treasury market instability.
“You break it, you own it.”