Blain's Morning Porridge
Blain’s Morning Porridge September 20th 2016
“If he flew them he was crazy and didn’t have to; but if he didn’t want to he was sane and had to.”
Here we are… poised on the edge of the two most important central bank meetings ever… (Rule 1: “the market has no memory”, and Corollary 2(a): “most important events are only important till the next most important event”.) Desperately hyped up events, such as “pivotal” central bank calls tend to disappoint in their inanity..
But..
A cynic might argue the Bank of Japan’s in-depth review of monetary policy actions will highlight that quantitative easing and negative interest rates have achieved precisely nothing. Not so – screams my Japan guru, Martin Malone. He thinks we’re likely to see something extraordinary tomorrow morning.
We simply don’t know what. There have been no leaks or tweets. My own guess is we’ll see some kind of minor adjustments to current policy – a tweak and a tinker here and there. But, a full scale re-jig and re-set of policy? Well, let’s wait and see what happens. Will it be market moving – if we get something big? Yes. If they disappoint? Yes.
And what if the Fed decides to shock us and hike? The consensus is Fed will sit tight, waiting for better data, but what if they feel they’ve waited long enough? What if they’ve decided to act? Market says 20% chance of a hike – but I wonder. 2 hikes before year end, and a firm commitment to monetary normalisation? What would that do to bond markets?
And there is a story on Bloomberg saying the Fed could be seen as political if it delays a hike till December – creating a false economy likely to support the democrats into the November election.
We’re already sitting in the path of a potential Taper Tantrum – uncertainty on the path of future monetary policy, diminishing faith in central bankers and fears that central bank asset purchases might not go on for ever – thus removing the crutch that’s kept the bond market at extraordinary levels.
If that faith is further thumped – by a less than extraordinary BOJ tomorrow, or a Fed surprise, then the tremblors we’re currently feeling in global bond markets could herald a Richter Scale 9 quake across not only bonds, but all financial asset classes by association.
To illustrate – folk have been buying practically anything with a smidge of yield – yesterday it was a feeding frenzy for AT1 and Tier 2 bonds launched by Clydesdale (smoothing out the UK bank’s capital ahead of its sale by NAB.)
However, the deal is also an illustration of how poor the current new issue distribution process is. A number of accounts were disappointed to get fairly small allocations – yet the book was apparently only 2x covered. That means smaller accounts got treated less well than larger ones during the allocation process.
We suspect a couple of big orders from big, influential funds were filled in full, leaving the rest of the market scrabbling after the crumbs. It’s not fair, and it should change – see my ideas for a new reverse auction driven independent allocation system.
Meanwhile, I recently read a fascinating article about Abraham Weld, a mathematician who invented the art of data analysis. During WW2 he led a team analysing damage to allied bombers, mapping every single bullet hole on damaged aircraft. The collective information showed lots of holes on the wings, nose and tails. The Air Force concluded they had to put additional armour on these spots.
Weld did a logic flip and pointed out the facts – these were planes that came back, the ones that didn’t were the ones being hit elsewhere; the cockpit, the engines etc. Put the extra armour in these places. It worked.
This morning, a fellow blogger pointed out the dangers in not digging deep into what data means. Although the amount of money betting for the UK remaining in Europe was huge, split the numbers down to details – and the actual number of bets to leave were larger. Despite the money saying the UK would remain part of Europe, each bet represented one vote, and each vote has the same value no matter what the monetary size.
The same thing is apparently happening for Trump. While Hillary is collecting enormous amounts of money – they are from large rich donations. Trump might be collecting less big money, but from a far wider number of supporters. Apparently he’s received over $100mm in the last three months from sub $200 donations. Should we be concerned..
Big Data, big numbers.. big worries..
Back to the day job.