In hubris and panic

If you are supposed to buy on rumour and sell on fact, what would the right trade have been yesterday, Thursday, after the Fed had made fools of pretty much most of the global investor community?

I challenged all and sundry in yesterday’s column to try to make us believe that they had forecast the FOMC’s decision to maintain the level of bond buying and only one individual came back to confirm that his group had made the call. However, he had to confess that his traders had not gone into Wednesday with the corresponding positions. Analyst shout or not, if it comes to losing money, it’s much easier to do it while in consensus with the peer group than when positioned against it.

Responses to the FOMC ran from “They did the right thing for the wrong reasons…” to “What the hell were they on…???”. Let’s face it, the FOMC is packed with first class intellects but, in truth, the Street isn’t exactly devoid of a spot of brain-power either. I, having always been on the hawkish side of the argument, was therefore caught deeply offside and am left wondering whether Ben Bernanke is not falling into the same trap his predecessor did by not having the courage to upset the closing period of his tenure by clamping down on putative bubble formations.

Does the fact that the finest thinkers of our generation remain confused when trying to pin-point the level to which the economy has repaired itself since 2008 justify or negate the right of lesser mortals like us from taking a view?

However, I took a lesson in revisionist thinking this morning when I tripped over an article about a speech which Warren Buffett had given yesterday at Georgetown University in Washington. While referring to the Federal reserve as the greatest hedge fund in history – and the most profitable one – he also stood four square behind it in stating that the Fed “is under no pressure, none whatsoever to have to deleverage. So it can pick its time, and if you have somebody wise there – and I think Bernanke is wise, and I certainly expect his successor to be – it can be handled. But it is something that’s never quite been done on this scale. It will be interesting to watch.”

Buffett has made his fortune by dint of two key behavioural characteristics. The first is that he makes up his own mind on what he wants to do and why but then doesn’t fiddle around while trying to micromanage the timing and the second is his unflinching bullishness on America. So, in a way, to hear him more or less unreservedly support the Fed’s action – or inaction, if you prefer – should not come as a surprise. Maybe he is coming out quite as supportive as he is because chairman Bernanke also looks to have decided that he would not be pushed into opening the tapering process by the consensual market’s desire to get it underway.

Confusion

Does the fact that the finest thinkers of our generation remain confused when trying to pin-point the level to which the economy has repaired itself since 2008 justify or negate the right of lesser mortals like us from taking a view? It doesn’t take a rocket scientist to work out that markets always overshoot, both when in hubris and in panic, but that does not help in working out where the correct value should be or is.

It was easy to say yesterday morning, after the sharp overnight rally, that 10-year treasuries look a bit on the high side at 2.69% but does that make them rich or cheap this morning at 2.73%? Likewise, just as Gilts broke north of 3% and we all knew that it was game over, what do we make of 2.90% today?

Fact is that Bernanke never said that tapering would begin on September 19 – he only said it would be before the end of the year – which leaves us with two more FOMC meetings ahead on October 29/30 and on December 17/18 plus the January 28/29 meeting at which he will be handing over to his successor before leaving the Fed on January 31.

So, was Wednesday a monster U-turn or a free and valid interpretation of his own stated policy? More to the point, did it spell the death of “forward guidance”? Is Bernanke’s closing act going to be to turn the Fed away from trying to tell the market what it is planning to do before it knows whether the necessary conditions to do that will ever occur and if so still be valid in terms of deciding on and then implementing the intended and hopefully appropriate monetary policy?

It was the Bundesbank which once declared that it was not the markets’ business to try to second guess it. I might be barking up the wrong tree here but it’s certainly worth a thought. Carney the Magician has already got his knickers in a twist with forward guidance so it might tacitly be a relief to him too if we stopped beating ourselves up due the prevailing obsession with transparency.

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Alas, it’s that time of the week again. All that remains is for me to wish you and yours a happy and peaceful week-end. This past week-end at Goodwood I watched a grid of 30 Ford GT40s racing together, something which has probably never happened before and will equally most likely never happen again. It was the 50th anniversary of the car. I looked these things of such elegant beauty and thought of the monsters which circle Le Mans nowadays and asked myself where it all went wrong. I look at the Hamiltons, Vettels and the Alonzos who are in Singapore this week-end and then see Hunt and Lauda in the new film and ask myself the same thing.

If, between ferrying the kids to karate and pottery, you have the choice of what to watch, you know what I’d suggest…