HEDGED.BIZ

A look at economics, markets, finance and the irrational human being

Bad news is good. Bad news is bad. Which one holds is arbitrary.

In recent times equity and credit markets have reacted to bad news with optimism, reasoning that weaker economic data would encourage the central banks to cut rates which would in turn boost the economy and support higher asset valuations. This is a perverse logic but one that supports trillions of dollars in investments. This year,
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A little change is coming…

Fiscal policy will join monetary policy in the fight against stagnation. 10 years of loose monetary policy has inflated assets while failing to raise growth or inflation. Orthodoxy is slowly pivoting towards fiscal policy. The textbook dangers of unlimited monetary and fiscal support are, excessive and rising national debt and the eventual loss of confidence
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Yield Curve Inversion. The Fed. The QE Trap.

For a while now, the Fed funds effective rate has pushed up against the upper bound of the Fed funds target rate. If not for the Fed, short term rates would have risen above the target range. We see this pressure in repo rates, not just this week but for some months now, where repo
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The Limits of Monetary Policy? The Price of Fiscal Policy.

Since the ECB announced a rate cut of 0.1% taking the desposit facility rate to -0.50% and a resumption of bond purchases at a rate of 20 billion EUR per month, the 10 year bund yield has predictably moved from -0.71% to -0.45%, a 0.26% rise, substantial when yields are that low. The ECB’s move
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ECB to disappoint. Lagarde expects fiscal policy to do the lifting.

I’ve been of the view, like so many other investors, that the would be dovish and a) launch LTRO early, b) cut rates, and c) do some form of QE (the market thinks outright QE, I thought unconstrained LTRO.) This view has led me to be long EUR duration from Bunds to Italian and Portuguese
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