One Trader Is Stunned By The “Staggering” Confusion In The Market

Wherever one looks there are disconnects… between bonds and stocks, between risk and uncertainty, between hope and reality. But, as former fund manager Richard Breslow notes, most critically, there is a divergence between data and Fed actions, and this time is different as central banks appear to have shifted into ‘whatever it takes’ to tighten policy from emergency levels mode. 

As Bloomberg’s Richard Breslow writes,

Ranges have been mostly tight in the foreign exchange market encouraging options traders to further reinforce the boundaries. After all, it’s now officially summer and attention is wandering. Trade the range that the market allows and go home as early as possible. Except that’s really bad advice.

One thing that has changed more and more over time is you just can’t predict when a move is going to happen. Summer doldrums, December somnolence are all true until they’re not. And increasingly less so. Day traders may schedule more holidays, but fund managers don’t and can’t reduce positions because it’s nice outside. One thing they know, far better than commentators, is you have to be in it to win it.

What makes this year even more interesting than most is that indecision isn’t being driven by our waiting on some financial crisis or election timeline, but by an extraordinary level of cognitive dissonance. The ability of people to string together utterly inconsistent arguments to describe what’s going on in markets, and the world for that matter, is staggering.

And most importantly, it makes, what are manifesting themselves as quiet markets, actually highly unstable.

The global economy can’t be simultaneously growing well and picking up momentum while limping into recession. Nor can it be buy every dip in carry if we are increasingly risk averse.

And if there’s one question that needs to be addressed, it’s whether investors or monetary policy makers better understand what central bank reaction functions will be to both data and market setbacks. It can’t be ignored that with everyone stressing over the four-week caning of oil prices, the Norges Bank removed its easing bias today.

In fact, look around the globe and tote up the preponderance of those surprising, hawkish or dovish, and you’ll see a pretty compelling picture.

And yet traders don’t buy it for a second. Something will have to give. It’s understandable that there’s been this impetus to flatten yield curves, but what happens if that global recession doesn’t come soon.

People forget that the Fed has two official mandates and a lot of discretionary leeway in addition. Poorly constructed measures of inflation don’t require them by some law to ignore labor market strength or other factors. They don’t have to be governed only by the lowest common denominator. Nor forever ignore the negative externalities of oppressively low global rates and how they further suppress yields and encourage profligate risk-taking.

Breslow’s apparently pro-rate-hike advice is simple…

Don’t spend your time zoning out. Use it to resolve some of these inconsistencies as you forecast and think about where asset prices will go.