Sunday, 4 October 2015

Are you so wrong it hurts or have you just tweaked your base case?

Are you so wrong it hurts? Or were you just so so right with your Fed and NFP calls?

As regular readers will have surmised I am a huge sceptic as to the value of each man hour employed Fed watching and forecasting. 

After the latest NFP figure I am hoping that guessing where NFPs will be is also consigned to the same trash heap of wasted manpower. Anchoring of expectations around an average has generated such a feedback loop of self-reinforcement that any deviation from expectation produces swings in response that dramatically outweigh what they deserve. Friday’s NFPs were a case in point. The market expectation was for a figure around 200k and a figure of 140k (a difference of 60,000 people out of 300ish million) has meant that expectations of future Fed rate action has been further pushed back, with the market now expecting that it may not be 'til March 2016  - which suits me as that’s always been my lazy 'uninformed but doing better than all you Fed analysts’ bet.

But you can’t have it all ways. You can’t say Fed forecasting is valid yet get it wrong in September in calling a hike, then shout and rant at the Fed for being so stupid, then forecast the NFP wrong with the actual figure then forcing you to push your Fed calls out to March. Sometimes you gain more respect and even gain a cathartic release, by just saying  “I was wrong. Just so wrong it hurts”. 

But no nononononononono. That’s as helpful to a career as a politician declaring that they take shed loads of Class As and have a penchant for butchered animal parts. It ain't gonna happen. Instead this weekend's bank research was littered with probability changes. Such as ‘Our model probability for an October rate hike is now below 50%’ Or ‘our base case for a September December rate hike is intact but our bias is for delay’ It’s all completely useless because none of this changed before the NFP was released and we could all see with our own eyes that it was lower than expected and probability outcomes had changed. If you can change your probability with impunity on a horse winning right up to the point it crosses the line then we would all be down at the track looking like gods.

Now even if you could call the Fed correctly that doesn’t mean you get given a cheque to retire on. That call has to be translated by the markets into cash and that is done by having a position in something. Granted, betting on Fed funds and the very short end of the curve is the most obvious high correlation translation of your Fed calling genius into profit, but most of the other stuff really isn’t. You can call the Fed spot on and still have a large probability of losing your shirt if you had put that into an equity index play. As we saw on Friday the NFP was bad enough not to cause any confusion as to whether it was bad or not, it was bad, yet the SPX, after plunging 2% on the falling growth story, put in a turnaround to end up 1%. Knowing the NFP would have been useless for you unless you also knew market positioning and which ever meme everyone else thought more important as we are back to 'Zirp forever buy equities' vs 'low growth falling earnings sell equities' basics. It isn’t easy.

I would also like to remind many commentators that Fed fund futures are NOT the probability of where Fed funds will be in the future. As they are set by the market we can add them to CDS and implied volatility as indictors that do not represent actual probabilities of outcome but market consensus guessed probability of outcome. 

The saddest omissions from all commentary this weekend are the apologies. I haven’t yet seen anyone apologise for their rants at the Fed for not raising rates in September, even those who are now saying ‘March earliest’. The whole Fed watching game is a game and I am hoping that the market will be getting bored with it and moving on to making investment decisions that aren’t based on 0.0025 of principal. 

Market from here - As per my last post I am still long FTSE things as it best encompasses all round risk bounces in DM, commodities and EM. I am fully aware that technically we are not yet out of the woods and I am equally aware of all the reasons for not being long which everyone who is short is screaming at me. When they are no longer short I will listen again. 

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