Calling an Audible
Jared DillianEditor, The 10th Man
I had something else planned for The 10th Man
today and scrapped it because of the stupendously amazing Fed meeting yesterday.
There are some things we need to
talk about—immediately. I’ll save the other piece for another time. I know
you’re accustomed to my grandiloquent prose, but today I’m just focused on
getting words down. And I’ll have a special announcement at the end.
So let’s review.
First we thought the Fed was
going to hike four or five times in 2016.
Then we changed our mind and
thought the Fed was not going to hike at all.
Then we changed our mind again and priced in four Fed
hikes.
The rates market has been really
schizophrenic about this, and the guidance from the Fed has been less than
clear.
So going into the FOMC meeting
yesterday, a consensus was building that inflation was starting to ramp and the
Fed was going to have to address it. Nobody was expecting a rate hike
yesterday, but people thought the Fed would be pretty hawkish and maybe start
pricing one in soon.
Didn’t happen—it was the most
dovish directive I have seen in some time. They explicitly took out two of the
four rate hikes, moved down the dots on the dot plot, downgraded their
assessment of the economy, and most important of all—expressed little or no
concern whatsoever about inflation.
I have seen a handful of sea
changes in Fed policy over the years, and this was a big one. This was a Fed
that went from being concerned about inflation pressures building to being
fairly glib about it. And the market did pretty much what you’d expect in
response to a central bank being glib about inflation:
- Gold went up
- Emerging markets went up
- The yield curve steepened
dramatically
- Base metals went up
- Commodity currencies rallied
In other words, the inflation
trade is back and bigger than ever, just like we’ve been talking about here and elsewhere.
This is no small thing. Pretend
for a moment that I were credible. I am telling you that there is going to be
inflation. How do you prepare?
The first question I would ask
is: What percentage of your portfolio is in fixed income?
Let me parse this for a moment.
Earlier, I said that the yield curve steepened dramatically yesterday, which
means the spread between short-term interest rates and long-term interest rates
increased. That is because short-term interest rates are driven by fed funds
expectations and long-term interest rates are driven by inflation expectations.
Two-year notes rallied hard, ten-year notes less so, and bonds were almost down
on the day.
The curve has been flattening
pretty steadily for a year now, so a six-basis-point steepening is a big deal.
This might sound like mumbo-jumbo
to someone who isn’t all that familiar with the bond market, so let me be
succinct: You do not want to
hold long-term bonds when inflation expectations start to ramp up.
I have a feeling that people are going to find out the meaning of duration.
I have said this before in Street Freak. We are going
to look back at negative yields and say, “Yup, that was a bubble.”
It’s a bond market
bubble—complete silliness. Holding paper with no or negative yields when
inflation is steaming ahead flank speed is unwise, to say the least.
Admit it: the risk-reward ratio
here is terrible. What do you think will be the real rate of return, after
inflation, on a 30-year bond yielding less than 3%? 30 years is a long time.
If you asked me what the dumbest
thing in the market is today, this is it.
All the Evil of This
World
I am very pleased and thrilled to
announce the publication of my second book: All the Evil
of This World.
I believe that this is the first
book of its kind: a Wall Street novel of real literary quality. There exists
Wall Street fiction, but it tends to be of the financial-thriller genre. And
the rest are non-fiction and memoirs. Here is the cover copy, which will tell
you what it is about:
There are humans
behind the big, bad investment banks. There are humans behind the calculations
of Wall Street. There are humans behind the legal and illegal financial
manipulations in the news. They’re not always the best humans, and they’re not
always the worst humans, but All the Evil of
This World tells their stories
with abundant curiosity, empathy, and honesty.
On March 2nd,
2000, the technology company 3Com spun off its insanely profitable hand-held
computer subsidiary, Palm. It was one of the most high profile, complex, and
bungled trades in history, and it’s a story about much more than the millions
and millions of dollars that instantly came into play. All the Evil of This World
tells it via seven separate voices from seven separate players, including an
ambitious low-level clerk fresh out of school, a drug-addicted, party-throwing
broker with bad taste and gross amounts of money, and a seemingly infallible
hedge fund manager tortured by his own good luck. The 3Com/Palm trade is what
weaves their stories together. They all collide into it and out of it, and it
sometimes unites them, implodes them, saves them, or destroys them.
It isn’t for the
faint of heart—these characters are just as troubled and intense and volatile
as their surroundings, and not a single punch is pulled—but it’s an examination
into a cast of characters that we rarely examine fairly or patiently, and who
we often find it too easy to dehumanize. The people who inhabit this world
aren't cartoon heroes or villains—as it turns out, they’re just like us.
There’s no other book that
captures how real, how raw the world of trading is.
It’s also an interesting piece of
historical fiction, about what the markets were like 16 years ago, when open
outcry was at its peak, before technology, before decimalization.
A warning: If you wouldn’t see an
NC-17 movie, you might not want to buy this book. It is graphic, jarring, and
relentlessly dark. But if you think you can handle it, it might be the most
important financial book you will ever read.
It’s available for pre-order on Amazon (and other places) in e-book form right
now. The hard copy will be available for sale when it is released on June 21,
if you’re the kind of person (like me) who likes holding a physical book.
I’d be honored to have you read
it.
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