Best Santelli Rant in a while..

[Martinghoul]

I have not gone for another year, no. Like they say, patience is a virtue and virtues get rewarded.

I will respond to Tsing Tao first, since it might be a little easier (and shorter).

Quote from Tsing Tao:
I don't believe Rick was comparing the US economy to the plant. I think he was saying that the Fed's fire hose was an enormous amount of water that was only achieving a tiny bit of benefit.

Yes, I understand the point of the fire hose metaphor. However, I also understood that Rick was using the little geranium plant as a metaphor for the US economy, at which the QE fire hose was directed. Could be that the geranium plant is the US labor market, like Max seems to suggest. I could be wrong, but that was the way I understood it.

You see no evidence of bubbles anywhere in the world's economy? Really?

Well, like I keep saying. If you tell me how to identify a bubble (other than in hindsight), I would happily look and tell you whether I see anything.

He answered it, even if you didn't like it. EE asked at what point do you tell investors to focus on the collateral damage, and Rick said they'll focus on it when they're drowning in liquidity - when it's too late. That's what I got. I suppose you can read whatever you want from it.

That wasn't an answer that I can do anything with. It's vague, since I have absolutely no idea what "drowning in liquidity" actually means. How does one quantify "drowning in liquidity"? And yes, of course, I can read it however I want, but then what exactly is the point of asking Rick?

It's rather difficult for the bond market to price anything in when the Fed is controlling it quite well with massive purchases, no? I mean, how can rates signal trouble ahead when the Fed is essentially keeping rates down?

Why just the bond market? There's the whole inflation derivatives mkt, including swaps and options (e.g. caps/floors). There's the FX market. There's the commodities markets. I cannot observe a bid for long-dated inflation hedges in a single one of these markets.

He is a journalist. The guy has a 4 minute slot to complete his text, so I'm sure he'd like to be a bit more verbose, but time doesn't allow it. That doesn't diminish the weight of the message, as long as you're willing to listen to it and not just write it off because you don't personally like the guy.

Well, you don't have to be verbose to be specific. It really doesn't take long at all to put some numbers on things. And you're mistaken in suggesting that I personally dislike Rick the person. I don't. I dislike Rick the journalist, much the same way I dislike other people who talk a lot, but say very little. Taleb is another such character, for instance, but let's not get into that.

I suppose it comes down to whether you like reporters telling you amusing, interesting and colorful stories. Through bitter experience (trades gone wrong, I mean), I have concluded that I have no interest and time for stories and prefer dry, boring facts. Rick doesn't give me what I want, hence my view.

 

[Tsing Tao]

Quote from Martinghoul:

I have not gone for another year, no. Like they say, patience is a virtue and virtues get rewarded.

I will respond to Tsing Tao first, since it might be a little easier (and shorter).


Yes, I understand the point of the fire hose metaphor. However, I also understood that Rick was using the little geranium plant as a metaphor for the US economy, at which the QE fire hose was directed. Could be that the geranium plant is the US labor market, like Max seems to suggest. I could be wrong, but that was the way I understood it.

Well, like I keep saying. If you tell me how to identify a bubble (other than in hindsight), I would happily look and tell you whether I see anything.

That wasn't an answer that I can do anything with. It's vague, since I have absolutely no idea what "drowning in liquidity" actually means. How does one quantify "drowning in liquidity"? And yes, of course, I can read it however I want, but then what exactly is the point of asking Rick?

Why just the bond market? There's the whole inflation derivatives mkt, including swaps and options (e.g. caps/floors). There's the FX market. There's the commodities markets. I cannot observe a bid for long-dated inflation hedges in a single one of these markets.

Well, you don't have to be verbose to be specific. It really doesn't take long at all to put some numbers on things. And you're mistaken in suggesting that I personally dislike Rick the person. I don't. I dislike Rick the journalist, much the same way I dislike other people who talk a lot, but say very little. Taleb is another such character, for instance, but let's not get into that.

I suppose it comes down to whether you like reporters telling you amusing, interesting and colorful stories. Through bitter experience (trades gone wrong, I mean), I have concluded that I have no interest and time for stories and prefer dry, boring facts. Rick doesn't give me what I want, hence my view.

Most of your post is vague and non-specific (and opinional), so I guess it's not useful (according to you). Certainly no dry, boring facts in there.

With exception, your comment regarding

Why just the bond market? There's the whole inflation derivatives mkt, including swaps and options (e.g. caps/floors). There's the FX market. There's the commodities markets. I cannot observe a bid for long-dated inflation hedges in a single one of these markets.

By QE (and the subsequent cornering of the bond market), the Fed is mis-pricing all risk. FX takes it's lead (long term) off yields. Commodities off the dollar. If the Fed promises to keep printing forever, no one is going to step in front of that. This doesn't mean inflation isn't around the corner for the man on the street, or isn't already on the ground. The government can put whatever "adjusted" CPI it wants out there. I work in the FMCG industry, on brands and grocery stores. I assure you, inflation in food (and energy) is a lot higher than the Fed or the market tells us it is.

What did the inflation derivatives market (swaps and options, caps/floors) the FX market and commodities do when the Fed's "taper" was supposedly right around the corner in the last month? What did all of them do in the last 48 hours after Bernanke spoke and clarified the "print" was on?

Did they not follow the Fed's lead? Can it not be said that the Fed is distorting what the market's signal should be because of it's action?

 

[Martinghoul]

Quote from Tsing Tao:
Most of your post is vague and non-specific (and opinional), so I guess it's not useful (according to you). Certainly no dry, boring facts in there.

You didn't ask me any specific questions, hence no dry, boring facts. Moreover, from the very inception of this discussion, I have been talking about my opinion and my personal preferences. Of course, you may very well decide that my opinion is not useful to you, in which case we should probably stop discussing.

By QE (and the subsequent cornering of the bond market), the Fed is mis-pricing all risk. FX takes it's lead (long term) off yields. Commodities off the dollar. If the Fed promises to keep printing forever, no one is going to step in front of that. This doesn't mean inflation isn't around the corner for the man on the street, or isn't already on the ground. The government can put whatever "adjusted" CPI it wants out there. I work in the FMCG industry, on brands and grocery stores. I assure you, inflation in food (and energy) is a lot higher than the Fed or the market tells us it is.

What did the inflation derivatives market (swaps and options, caps/floors) the FX market and commodities do when the Fed's "taper" was supposedly right around the corner in the last month? What did all of them do in the last 48 hours after Bernanke spoke and clarified the "print" was on?

Did they not follow the Fed's lead? Can it not be said that the Fed is distorting what the market's signal should be because of it's action?

My point about the price of "hyper-inflation" hedges was actually not really very specific either, but I am happy to expand if you like. In answer to your questions, no, I am not referring to the things that move when Bernanke speaks. That doesn't really offer any sort of useful evidence. I am talking about low delta, far OTM options, which people should be hoovering up to protect themselves against any crazy inflationary episodes that might occur in the future. If you would like me to provide you a specific example or two, I'd be happy to do that.

 

[Maverick74]

I guess I drew the short straw in the Martin raffle. Damn. It's always the other guy.

 

[Martinghoul]

Quote from Maverick74:
I guess I drew the short straw in the Martin raffle. Damn. It's always the other guy.

I did say I will respond to you, Mav, and I will.

 

[Tsing Tao]

Quote from Martinghoul:

You didn't ask me any specific questions, hence no dry, boring facts. Moreover, from the very inception of this discussion, I have been talking about my opinion and my personal preferences. Of course, you may very well decide that my opinion is not useful to you, in which case we should probably stop discussing.

My point about the price of "hyper-inflation" hedges was actually not really very specific either, but I am happy to expand if you like. In answer to your questions, no, I am not referring to the things that move when Bernanke speaks. That doesn't really offer any sort of useful evidence. I am talking about low delta, far OTM options, which people should be hoovering up to protect themselves against any crazy inflationary episodes that might occur in the future. If you would like me to provide you a specific example or two, I'd be happy to do that.

Two yes or no questions, to cut through the BS (on both sides).

Is the Fed currently distorting a proper measurement of risk in the financial markets with it's QE program?

Do you believe that yields would be much higher if the Fed was not in the market?

 

[bigarrow]

Quote from Tsing Tao:

Two yes or no questions, to cut through the BS (on both sides).

Is the Fed currently distorting a proper measurement of risk in the financial markets with it's QE program?

Do you believe that yields would be much higher if the Fed was not in the market?

There needs to be an I don't know choice also.

1st question: I don't know
2nd question: higher yes, how much I don't know

 

[Tsing Tao]

Quote from bigarrow:

There needs to be an I don't know choice also.

1st question: I don't know
2nd question: higher yes, how much I don't know

There's always an "I don't know" option. But since Martin knows all, he won't need to check that box.

 

[kinggyppo]

Quote from denner:

Your entire post is great, Maverick...but this is the best quote of the bunch.

agree good summation of what's going on. Fed printing at minimum has and will have negative unintended consequences. If you look at the problems on the state level in the US you can see what's going on. Its pretty glaring because the states can't print to pay their obligations.

 

[Martinghoul]

Quote from Tsing Tao:
Two yes or no questions, to cut through the BS (on both sides).

Is the Fed currently distorting a proper measurement of risk in the financial markets with it's QE program?

Do you believe that yields would be much higher if the Fed was not in the market?

1. Are you referring to just the QE-driven "distortion" or also the impact of the "low rate for a long time" policy? Also, when you say "currently", are we talking about today or back when the original video was posted? In general, I don't think we have a long time to wait, as I think QE3 will be going away starting September, barring any accidents.

2. No, I don't. The measure I (and many old-school types) normally use to get a very rough idea of what's "fair(ish)" over the really long run is simply the spread between Fed Funds and 10y yield. I can't tell you the exact number for the long-run average right now, but I think 350bps is the high and -100bps is the low. Currently, after the recent selloff, we're at 250bps or so, which, to me, doesn't look unnaturally low. So I don't think yields would be much higher without QE3. Maybe 50-75bps max. My Z$2c, take w/pinch of salt and the various caveats.