Global Macro Trading Journal

"Outlook Continues To Dim" - Powell Prepared Remarks Signal Dovish Bias Persists
*POWELL: UNCERTAINTIES SINCE JUNE FOMC CONTINUE TO DIM OUTLOOK

I'm normally pretty good at calling Fed moves in advance, I have made good money over the years in Fed funds futures. Yet, I dont understand what is going on now. In December Powell was hiking, now its July, SPX is at all-time highs, the economy is doing fine and the man is talking seriously about cuts. I havent been following the speeches, Fed articles and all that so maybe that's the problem but I find myself scratching my head to understand what the hell they are up to.
The only thing that I can think of is that they are trying to engineer a soft landing by anticipating a downturn way ahead of time. Seems a high risk high reward kinda of game
 
The graph below tracks the comparative differentials (Fed Funds vs. Fed Fund futures) using the methodology outlined above. The gray rectangular areas represent periods where the Fed was systematically raising or lowering the Fed funds rate (blue line). The difference between Fed Funds and the futures contracts, colored green or red, calculates how much the market over (green) or under (red) estimated what the Fed Funds rate would ultimately be. In this analysis, the term overestimate means Fed Funds futures thought Fed Funds would be higher than it ultimately was. The term underestimate, means the market expectations were lower than what actually transpired.

To further help you understand the analysis we provide two additional graphs below, covering the most recent periods when the Fed was increasing and decreasing the Fed Funds rate.
1-9.png


https://www.zerohedge.com/news/2019-07-10/investors-are-grossly-underestimating-fed

"The market has a long history of grossly underestimating, in both directions, what the Fed will do."

Its interesting how this market 'errors' have siginificantly been reduced since the Fed started to be more open in its communications in 2011 under Ben Bernanke.
But this graph shows well why it has been difficult to make money in Fed futures or even in bonds in the last decade. In the previous ones there was plenty of inneficiencies, now they are much smaller
 
The first thing I noted was that the estimates were off a lot more when rates are coming down. If I'm reading the caption correctly, this means the market was pricing for higher rates than what materialized in the green zones; i.e. the cuts are consistently sharper than people were expecting?
 
Magic said:
The first thing I noted was that the estimates were off a lot more when rates are coming down. If I'm reading the caption correctly, this means the market was pricing for higher rates than what materialized in the green zones; i.e. the cuts are consistently sharper than people were expecting?
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Yes. However I would caution towards using this as a guide for the future (as the author of the article did). I dont think it means anything going forward. The current Fed is super different from the old Fed. Starting from 2011 and 2012/2013 they started pretty much telling people exactly what they were going do to. That never happened before. In the past it was the opposite they would engage in "constructive ambiguity", they would be vague on purpose to encourge liquidity in both sides of the bond market (according to Greenspan in his book). These days we have dot plots and press conferences after meetings. Its a completely different Fed
 
Ackman is now buying BRK shares, I agree with him. Its a good entry bellow $200. Buffett's buyback is probably running on all cylinders right now
 
I'm not going crazy on it because there is the chance the US is headed to recession soon, before BRK has a chance to pop over $210-$215 but the most likely scenario is for the stock to pop higher within a few months
 
Daal said:
I'm not going crazy on it because there is the chance the US is headed to recession soon, before BRK has a chance to pop over $210-$215 but the most likely scenario is for the stock to pop higher within a few months
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There is a 100% chance the US (and the world) are heading into a recession if Trump keeps escalating this trade war. China will not back down from this.
 
Overnight said:
There is a 100% chance the US (and the world) are heading into a recession if Trump keeps escalating this trade war. China will not back down from this.
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Trump thinks its politically profitable to battle China, but it will no longer be if that produces a bear market or a recession before an election. Therefore he will not do that as he is not stupid.
 
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