Summary – A top-down review of interesting calls and comments made last week in Treasuries, monetary policy, economics, stocks, bonds & commodities. TAC is our acronym for Tweets, Articles, & Clips – our basic inputs for this article.
Editor’s Note: In this series of articles, we include important or interesting Tweets, Articles, Video Clips with our comments. This is an article that expresses our personal opinions about comments made on Television, Tweeter, and in Print. It is NOT intended to provide any investment advice of any type whatsoever. No one should base any investing decisions or conclusions based on anything written in or inferred from this article. Macro Viewpoints & its affiliates expressly disclaim all liability in respect to actions taken based on any or all of the information in this article. Investing is a serious matter and all investment decisions should only be taken after a detailed discussion with your investment advisor and should be subject to your objectives, suitability requirements and risk tolerance.
1.What counts & only what counts
We have said before that the only thing that counts these days is the expectation of Fed tightening. Look at what happened this week. On Tuesday, NY Fed President Dudley said on Maria Bartiromo’s FBN show that he could see two rate hikes this year and that the September FOMC meeting could see the first. Coming from Dudley with Hilsenrath in attendance, it sounded serious. Stocks, Treasuries & Gold all went down.
Then came the minutes on Wednesday afternoon. While some thought of the minutes as hawkish, they were less hawkish that what Dudley had priced in on Tuesday morning. So Stocks reversed their decline; Treasury yields fell & Gold rose a bit. But the action was not robust or even really believable, not with the overhang of Chair Yellen’s speech at Jackson Hole next week. We saw the jitters return on Friday when John Williams of San Francisco Fed said that they could hike rates in the September meeting. Stocks fell, Treasury yields rose and Gold fell.
What is a better way to measure rate hike expectations than listening to Fed-heads? We don’t know whether it is better or worse but we have a simple metric to try & judge that for ourselves. We eschew inter-asset class analysis because of the possibility of noise and correlation complexities. We prefer to look at how leverage is translating into performance within the same asset class or better subclass.
For example, HYG is the well used non-leveraged High Yield ETF and DPG is a leveraged closed end fund in the same asset subclass. DPG should outperform HYG when leverage is a virtue and underperform when leverage is a vice. And when is leverage a vice? When the cost of leverage is being priced higher. And that happens when markets begin pricing in higher expectations of rate hikes. Another such example we use is from Muniland – a leveraged closed end Muni fund like PNF vs. non-leveraged Muni ETF MUB.
Look at these two cases for the month of August:
It seems clear that the leveraged PNF & DPG have underperformed the unleveraged MUB & HYG since August 1 and especially since August 5, the day NFP report surprised on the upside.
This rise in rate hike expectations is why stocks, bonds & gold have not been able to make any progress this month. This should resolve one way or other in two weeks, first with Chair Yellen’s speech next week and the August NFP report in two weeks on September 2.
There is no way we can get the Fed-heads to shut up and let the FOMC statements/pressers communicate the Fed’s decisions. So we will do what we can and shut up until Chair Yellen speaks next week.
Send your feedback to [email protected] Or @MacroViewpoints on Twitter.