New CME Bitcoin Futures And The Goldman Sachs Connection

Embedded into Bincoin’s genesis block by Satoshi Nakamoto on January 3, 2009, the day Bitcoin went live, was a message which is now well-known throughout the Bitcoin community. This message, taken from The Times newspaper of that day, read “Chancellor on brink of second bailout for banks”.

While there is ongoing debate as to its significance, the message was arguably a commentary on Satoshi’s less than favorable regard for the parasitic, unstable and inflationary nature of the contemporary banking system, as well as a statement on Bitcoin being able to provide a more equitable transfer system by cutting financial institutions out of the equation.

Elsewhere, Satoshi had elaborated on banks, again is a less than flattering way:

“Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts. Their massive overhead costs make micropayments impossible.”

We can therefore conclude that the Bitcoin creator does not have a high opinion of banks in general, which probably also explains why Satoshi created Bitcoin in the first place, and why Satoshi’s white paper about Bitcoin was first published on a cypherpunks mailing list, and not, for example, within the pages of a Bank for International Settlements (BIS) research report.

Which is why it would be intriguing at this time to know what Satoshi thinks of the imminent launch of (US dollar cash-settled) Bitcoin futures by the CME Group. But even more interestingly, it would be intriguing to know what Satoshi would think of the fact that the settlement prices of these new CME Bitcoin futures are based on calculations by a private London-based company whose founder and sole director is from Goldman Sachs.

As a reminder, this is the same Goldman Sachs which Matt Taibbi described as follows, coincidentally also in 2009:

"The first thing you need to know about Goldman Sachs is that it"s everywhere. The world"s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money."  

This is also the same Goldman Sachs, whose alumni currently occupy positions in the most powerful financial positions in the world, positions such as US Secretary of the Treasury (Steven Mnuchin), President of the European Central Bank (Mario Draghi), Governor of the Bank of England (Mark Carney), and President of the Federal Reserve Bank of New York (Bill Dudley).

The Fix is In: CME Bitcoin Futures

One key feature that stands out when glancing at the contract specs of these soon to be launched CME Bitcoin futures contracts is that they will be cash-settled based on a “CME CF Bitcoin Reference Rate (BRR)”

A recent CME press release elaborates:

“CME Group"s Bitcoin futures will be cash-settled, based on the CME CF Bitcoin Reference Rate (BRR) which serves as a once-a-day reference rate of the U.S. dollar price of bitcoin.  

 

Since November 2016, CME Group and Crypto Facilities Ltd. have calculated and published the BRR, which aggregates the trade flow of major bitcoin spot exchanges during a calculation window into the U.S. Dollar price of one bitcoin as of 4:00 p.m. London time.

 

The BRR is designed around the IOSCO Principles for Financial Benchmarks.

 

Bitstamp, GDAX, itBit and Kraken are the constituent exchanges that currently contribute the pricing data for calculating the BRR.”

A reference rate / benchmark calculated in the City of London that is used as a basis for the settlement of multi-billion dollar financial contracts. Wait, where have we heard that before?

The CME web site also helpfully hosts a methodology document for this Bitcoin Reference Rate (BRR), but which strangely has very little mention of CME, and a lot of citations to Crypto Facilities Ltd.

The document is even titled "Crypto Facilities - Digital Assets Unleashed" (dated March 6, 2017) and also copyrighted by Crypto Facilities Ltd. “© 2015 - 2017 CRYPTO FACILITIES LTD. ALL RIGHTS RESERVED. PATENT PENDING.”

In this methodology document, both the Administrator and Calculation Agent of the BRR are exclusively listed as "Crypto Facilities Ltd", based at an address in the City of London:

Contact Details: Crypto Facilities Ltd 4th Floor 25 Copthall Avenue London EC2R 7BP

 

Web: https://www.cryptofacilities.com Phone: +44 20 7655 6085 Email: contact@cryptofacilities.com

So who or what is “Crypto facilities Ltd”?  Looking at the UK Companies registration web site (Companies House), reveals that "Crypto Facilities Ltd" was incorporated on 12 August 2014 as a private limited company in the UK.

According to Companies House, "Crypto Facilities Ltd" only has one director, a certain Timo Schlaefer.

Who is this Timo Schlaefer? According to LinkedIn, Timo Schlaefer was with the Vampire Squid Goldman Sachs between 2011 to 2015. Strangely though, the header of Schlaefer"s LinkedIn profile still says “Goldman Sachs”.

LinkedIn screenshot https://uk.linkedin.com/in/timoschlaefer/en

Then there is a Bitcoin Magazine article about Schlaefer dated February 2015 which describes him as “Executive Director in Credit Quantitative Modelling at Goldman Sachs.”

In summary, here we have a new Bitcoin futures contract, a derivative on the global phenomenon that is Bitcoin, whose settlement price is based on a reference rate calculated in London by an unknown company whose sole director is from Goldman Sachs.

But there is nothing to worry about, because CME also confirms that there is an Oversight Committee for this Bitcoin Reference Rate calculation. This committee has the impressive title of the “Bitcoin Pricing Products Oversight Committee”, and the Committee:

“has been established jointly by Crypto Facilities Ltd. (“CF”) and Chicago Mercantile Exchange Inc. (“CME”).

 

The initial members of the Oversight Committee and its Chairman shall be appointed jointly by CF and CME”

While we will leave you to ponder what all of this means, its difficult to imagine that US dollar cash-settled CME Bitcoin Futures were on Satoshi’s radar when he typed “Chancellor on brink of second bailout for banks” into his computer on January 3, 2009, hitting the enter key and kicking off Bitcoin’s genesis block and the creation of a new global system for disintermediating banks and sparking the emergence of an entire new universe of crypto currencies and blockchain platforms.

NY Fed President Bill Dudley Retiring

The Federal Reserve"s "smooth transition" from Janet Yellen to Jay Powell is set for a major speedbump.

Just two short days after Donald Trump confirmed what weekly trial balloons had reported for weeks, namely that Janet Yellen is being replaced with most "dovish" alternative possible in the face of former Carlyle partner and 5 year Fed governor Jerome Powell, the person who according to some is even more instrumental to Fed policy than Janet Yellen, NY Fed president Bill Dudley is reportedly leaving.

Late on Saturday evening, CNBC"s Steve Liesman reported that Fed vice chairman Bill Dudley, a former Goldman managing director and chief economist, not to mention a key figure in "the unprecedented government response to the financial crisis", is set to join Janet Yellen among the ranks of the unemployed (if only until he hits the speaking circuit and writes a book explaining that the Fed is the cause of the world"s problems) and announce his retirement as soon as next week. 

Dudley, who has has headed the bank since 2009, will likely retire sometime in the spring or summer of 2018 when his replacement is found and approved, sources told CNBC. His term ends in January 2019. A search committee has already been formed.

According to Liesman, Dudley told several colleagues he was planning to leave in 2018, "and his departure is said not to be related to the decision last week by President Donald Trump to name Fed Governor Jerome Powell as the next Fed Chairman." Which probably means that Dudley"s departure is precisely that: a protest against Trump"s removal of Yellen with whom Dudley had a pristine relationship.

Dudley, set to turn 65 next year, became NY Fed president in the immediate aftermath of the Great Financial Crisis and was instrumental in devising the Fed"s ZIRP and QE policies.

As president of the New York Fed, Dudley holds a special spot among the dozen regional bank presidents. The incumbent always serves as vice chairman of the rate-setting Federal Open Market Committee (FOMC) and always votes at policy meetings, while other regional presidents have a rotating vote. More importantly, before he became NY Fed president, Dudley headed the New York Fed"s markets group - also known elsewhere as "the plunge protection team" - which Liesman describes as "a critical job that oversees the trades and market operations required to set the Federal Funds Rate." Liesman is right.

In both positions, Dudley was a principal player in Fed decisions concerning the demise of Lehman Brothers, AIG and Bear Stearns, along with emergency measures taken by the central bank to stanch a meltdown in the financial system.

Dudley"s "list of accomplishments" is long: several trillion dollars long in fact. Under the former Goldman executive, the NY Fed was responsible for accumulating the trillions in assets the Fed purchased under QE, bringing its balance sheet up to $4.5 trillion. It is now responsible for the market operations underway to reduce the balance sheet.

Dudley"s departure comes at a time of dramatic change at the Fed. in addition to a new Fed Chairman, Vice Chairman Stan Fischer left his post in October, and there are currently three open seats on the seven-member Board of Governors. That number may rise to four if Yellen leaves the board when Powell is confirmed, and before others are nominated and confirmed by the Senate.

The choice of Dudley"s replacement will be made by the New York Fed"s Board of Directors and approved by the Federal Reserve Board. Dudley is expected to speak at the economic club of new York at noon on monday.

With Dudley"s departure, the Fed will lose one of its more prominent centrists as the following Dove-Hawk ranking from Barclays shows.

As for new Fed chair Jay Powell, while many already had a low opinion of him being able to keep the system together once the next crash happens, the departure of a key Fed veteran such as Bill Dudley will only make it that much more complicated to preserve stability in the not too distant future. Here are some scathing thoughts from Capital Economics on Powell"s tenure as next Fed chair:

Powell an underwhelming choice to be Fed Chair

• Some are born great, some achieve greatness and some have greatness thrust upon them. Jerome Powell belongs in the third category. President Donald Trump’s nomination of Powell to be the next Fed Chair is an underwhelming choice. The Fed will face many difficult challenges over the next few years and it is unclear whether Powell has the skills to navigate them.


• The polite thing to do would be to offer some platitudes about Powell being the ‘safe’ choice, who will provide continuity with the Yellen-led Fed’s monetary policy approach of gradually normalising interest rates and might be more inclined to loosen financial regulation. That said, although Powell is more open to deregulation than Yellen, he is hardly a free market zealot. He has expressed support for simplifying and “recalibrating” regulation, particularly the Volcker rule but, at the same time, he has warned that “it is essential that we protect the core elements of these reforms for our most systemic firms in capital and liquidity, stress testing and resolution”. At least financial markets will be comforted that Trump didn’t pick the potentially much more hawkish John Taylor or Kevin Warsh.


• Nevertheless, Powell’s resume is not up to the standards we would expect of a nominee for Fed Chair. For a start, unlike the last three Fed Chairs, he is a lawyer rather than an academically trained economist. His other experience is in investment banking and private equity. He also spent some time at the Bipartisan Policy Center and worked in the Treasury for a couple of years during the Bush Snr administration. None of those roles marked him out to be the next leader of the world’s most important central bank.


• Powell was only nominated to join the Fed’s Board of Governors in 2011 because then-President Barack Obama needed a token Republican to ease the accompanying nomination of Jeremy Stein through the Republican-controlled Senate. Since joining the Board, Powell has had little to say of any interest. His speeches have focused on regulatory issues and when he has spoken about monetary policy issues, he has been careful never to deviate from the in-house view. Not surprisingly, markets initially didn’t see Powell as a possible candidate to be Fed Chair.


• Admittedly, we could be wrong about Powell. He is still something of an enigma and he may emerge as a strong leader with a firm grasp of monetary and economic issues. His Senate nomination hearing in the coming months will provide the first insight into what type of Fed Chair he will be. Regardless of his performance at the hearing, however, we expect him to be confirmed without too much drama.


• There is an argument to be made that Powell’s market experience could prove to be crucial in the coming years. But there are potentially even bigger challenges ahead. As an institution, the Fed is grappling with the most fundamental question of what drives inflation in the modern US economy, as it seeks to explain why it has been unable to hit its 2% inflation target consistently. Should the Fed stick with the orthodox Phillips curve view that shrinking slack in the labour market and wider economy will eventually generate an acceleration in wage and price growth or abandon that framework? If the Fed does abandon it, what becomes the working model of inflation? Inflation expectations? Does inflation targeting even make any sense in a world where interest rates influence domestic activity and employment, but activity and employment don’t influence prices? Monetary targeting was abandoned because the old relationships with prices broke down. Inflation targeting isn’t sacrosanct. We would feel more comfortable if it was the academically outstanding economist Janet Yellen who was leading that research, particularly when she had the benefit of the strong intellect and experience of Vice Chair Stanley Fischer at her side.


• Powell’s nomination means that we still expect the Fed to raise interest rates once more this year and then four times next year. That is slightly more hawkish than the FOMC’s own projections imply, but those forecasts don’t appear to factor in a fiscal stimulus. Beyond that, a lot still depends on who Trump picks to fill the other vacancies on the Fed’s Board. With Powell’s promotion, there will be four vacancies, including the Vice Chair position. Otherwise, the risk of a serious policy mistake – in either direction – will arguably be higher under Powell’s leadership than under Yellen’s. And policy communications may become more muddled, if Powell doesn’t provide strong intellectual leadership and the policy debate descends into a free-for-all among regional Fed Presidents.

"What Are We Going To Do?" Puerto Rico In Chaos As Cash Runs Out

Most Puerto Ricans haven’t had access to electricity, cell service or financial services for nearly two weeks now. And as we reported yesterday, residents who didn’t stockpile enough cash have been struggling after Hurricane Maria essentially knocked the island’s economy into the 1950s, forcing some to forgo essential supplies - or worse - resort to looting. For those who do have access to working ATMs and banks, long lines have sapped cash reserves as the country has effectively reverted to a "cash only" economy.

Those whose access to cash has been limited - or cut off entirely - are becoming desperate as they start to wonder how they will begin the process of rebuilding their trashed homes - or even where their next meal will come from. As Reuters reports, cash has become just one of many scarce resources on the island (food, medical supplies and gas are also in incredibly short supply).

With electricity and internet down in Yauco, southwestern Puerto Rico, Nancy and Caesar Nieve said they could not access paychecks directly deposited into their bank accounts.

“What are we going to do when we don’t have any cash? The little cash we have, we have to save for gas,” said Nancy.

Cash demand spiked in the first few days after the hurricane as merchants were unable to accept other modes of payment. First BanCorp, one of the island’s largest banks, said that nearly two-thirds of its 48 branches remained closed, and that electronic transactions had resumed at only 25% of its ATMs.

Apparently, word of these privations made its way back to the New York Fed, which has assured the world via the Wall Street Journal that the central bank has plenty of physical cash to keep banks on the island stocked for the forseeable future - lowering the likelihood that anybody will suffer for lack of access to cash. Notably, the WSJ didn"t explain where that money was being held, how long supplies are expected to last or how it got there in the first place.  Indeed, the central bank said only that it"s "prepared to meet elevated currency demand following the natural disaster." Reuters noted that the central bank ships cash to a depot on the island, and that before the storm it increased the size of its shipments.

As WSJ explains, Puerto Rico is in the New York Fed’s district despite its location in the Caribbean. In times of economic stress or a natural disaster, Fed regional banks plan ahead to make sure area banks have enough cash.

Of course, none of this matters if you can"t get to a bank or an ATM. But at least, if they somehow manage to find an open bank branch or working ATM, Puerto Ricans can rest assured that it will be freshly stocked with cash.

But Puerto Ricans might want to hold off before thanking Bill Dudley for his foresight. It’s worth asking exactly how long the island’s cash inventories will last. After all, the storm tore up roads and leveled buildings, potentially complicating deliveries of cash. And with authorities still focusing on search-and-rescue missions and other aspects of the preliminary response, it could take for some areas of the island to return to some semblance of normalcy.  

Furthermore, looting has become increasingly common across the island, increasing the danger that deliveries of cash could be intercepted by bands of robbers.

In a statement, the New York Fed said armored-car services are able to reach banks with cash, and automated teller machines are “once again active.”

With any luck, the recovery effort will soon kick into high gear after President Donald Trump on Thursday suspended the Jones Act, which will allow more ships to assist in the international relief effort. It’s unclear why the administration hesitated to waive the law.

But is the Fed really doing all it can to alleviate the crisis in Puerto Rico? With the bankrupt island nation facing a $30 billion cleanup effort – and potentially more if it’s entire power grid needs to be upgraded – maybe the central bank could help monetize some of these expenditures.

Oh wait…
 

#FedGibberish!

Authored by 720Global"s Michael Lebowitz via RealInvestmentAdvice.com,

Recently on our Twitter feed, @michaellebowitz, we introduced the hashtag #fedgibberish.

The purpose was to tag Federal Reserve members’ comments that highlight desperate efforts to rationalize their inane monetary policy in the post-financial crisis era. This past week there were two quotes by Fed members and one by the head of the European Central Bank (ECB) which were highly deserving of the tag. We present them below, with commentary, to help you understand the predicament the Fed and other central banks face.

Lael Brainard

On September 5, 2017 Fed Governor Lael Brainard stated the following in a speech at the Economic Club of New York:

“We should be cautious about tightening policy further until we are confident inflation is on track to achieve our target.” – “There is a high premium on guiding inflation back up to target so as to retain space to buffer adverse shocks with conventional policy.”

Let us rephrase: The Fed must be careful not to raise interest rates further until signs of inflation appear. When said inflation does pick up and it meets our target, we can then raise interest rates further. In doing so, we will then have the ability to lower interest rates when the economy hits a rough spot.

Inflation has been benign since the 2008 financial crisis. Clearly, nine years of the lowest interest rates on record have not been inflationary for the prices of goods and services that make up most standard economic inflation gauges. In fact, it is difficult to find a better real world example of deflation than the incoherence of negative interest rates manufactured by some central bankers who are begging for inflation. That said, there is a strong positive correlation between the amount of Fed stimulus and the price of financial assets. What Lael Brainard and her colleagues fail to understand is that excessive Fed policy has diverted capital away from productive investments that would generate the inflation and economic growth she and her colleagues so desperately seek to conjure. The bottom line is they do not understand the effect that eight years of excessive stimulus have had on the economy and are clearly unaware of what must be done to solve the global economic malaise.

Neel Kashkari

On September 6, 2017 Neel Kashkari from the Minneapolis Fed stated the following:

“Fed rate hikes may have done real harm to the economy.”

Kashkari senses economic weakness, which he believes is occurring as a result of the Federal Funds rate increasing from zero to 1.25% over the past 21 months. While that statement might be legitimately arguable, he is woefully negligent in helping his listeners understand why the economy is struggling despite the lowest rates in recorded history. An economy that cannot handle such a rise in the cost of money is symptomatic of a society burdened by too much debt. We posit that the economic problems the Fed aims to fix are the result of abnormally low interest rates and other stimulus of years past. These have not had the desired economic effects and have also curtailed future growth. After all, the use of debt pulls forward future consumption leaving less consumption in the future. Mr. Kashkari should consider that encouraging more debt is not the way to solve a debt burden. Either that, or he should let us in on his plan to forestall the arrival of the future from which consumption has been borrowed and payback is required.

Mario Draghi

On September 7, 2017 ECB President Mario Draghi stated:

“We do not see negative effects of QE”.

We are speechless. We simply ask Mr. Draghi – if there are no negative effects of QE then why are you contemplating tapering QE? In fact, why are the European people not rioting with pitchforks for a lot more QE?

There is no doubt in our mind Draghi’s statement flat out lie will become obvious over time. Until the media and the markets awaken from their central bank induced slumber, we leave you with the infamous words of prior ECB President Jean-Claude Junker:

“When it becomes serious, you have to lie.”

As we put the finishing touches on this commentary, New York Federal Reserve President Bill Dudley pointed out that the longer-run effects of disasters like the recent hurricanes actually lifts economic activity. Our reply to this absurd comment is simple: #fedgibberish

The Two Things To Look For In Today's FOMC Minutes

There are two, also known as non-GAAP four, things to look forward to in today"s FOMC Minutes: inflation, and balance sheet, balance sheet, balance sheet.

At 2pm, the FOMC will release the minutes of the July 25-26 meeting when, as expected, the Fed left its rate unchanged and gave few surprises in its characterization of the outlook. It did surprise many, however, by noting that it expects to begin implementing balance sheet normalization "relatively soon", language which most had not expected to be introduced until September; this, as UBS notes, is the condition the FOMC set for unwinding its balance sheet, so we now see the Fed announcing its balance sheet normalization policy in September. While there will be no earthshattering revelations, look to the Minutes to shed additional light on the Committee"s debate on this timing and views on the outlook for inflation, which will determine future rate hikes.

Going back to the July 26 statement, the FOMC"s characterization of inflation was uninformative, merely reflecting the softness in the last several prints. In the minutes, some hope to find if the language reflects strongly held views that the softness is transitory, or if there were participants that wanted to raise more alarm about the inflationary outlook, but were outnumbered. Chair Yellen has been explicit that the outlook for inflation will determine the timing of future rate hikes.

Leading up to the meeting, Fed officials were explicit that they believe that inflation weakness is transitory but that they need to see evidence that inflation is rising before hiking again. Further complicating matters, the July CPI print - the fifth miss in a row - did not provide sufficient evidence. As a result, the breadth of inflation views within the Committee should inform the sellside"s calls on the next hike.

As for the Fed"s balance sheet "normalization", the Fed has made a distinction between announcing and implementing the balance sheet runoff. The new "relatively soon" language represents a marker that the announcement is forthcoming, according to UBS. As a result, the FOMC will likely make that announcement at the September meeting, with runoff commencing in October. The Minutes need to clarify the Committee"s communication plans and the gap between announcement and implementation.

There is more ambiguity regarding whether the Fed will again raise rates: while many still hold out hope for a third hike in December, inflation has to accelerate. Still, the Committee likely desires some time between the announcement of balance sheet runoff and its next hike. Three months should be sufficient for the Committee to assess the market reaction, but the Minutes may indicate otherwise so this too will be closely parsed for any indication of a longer pause.

Finally, two areas demand more information.

• First, how will the Fed time the unwind? The MBS market has a different cycle than the Treasury market. The Fed needs to clarify operational details around their monthly caps.


• Second, there is little information from the Fed on its long-term framework for the balance sheet, which will determine the terminal size of the balance sheet. We expect the minutes to address the operational details, but not the terminal size of the balance sheet. We expect a terminal balance sheet of $3.3 trillion reached in 2¾ years.

Not enough? Here is RanSquawk"s detailed preview of what to expect in today"s Minutes:

FOMC’s July 2017 Meeting Minutes Preview, Due For Release At 19:00 London, 14:00 New York On Wednesday 16th August 2017

The July meeting saw the Federal Reserve leave it Federal Funds target range unchanged at 1.00-1.25%, with a 9-0 vote. Heading into the decision focus was on the rhetoric surrounding the normalisation of the FOMC’s balance sheet, and the policy statement (full version available here) noted that the Committee expects to begin shrinking its balance sheet "relatively soon." The statement also saw the Fed highlight that it expected inflation on a “12-month basis” to remain below 2% in the near-term (which was deemed dovish), although the statement did go on to highlight that the FOMC expects inflation to stabilise around 2% over the medium term.

The language surrounding these two areas will once again garner the most attention in the upcoming release. Barclays expect the minutes of the July FOMC meeting to “provide further information regarding the timing of balance sheet normalisation and the degree of consensus within the committee.”

While HSBC believe that “the July minutes are likely to show extensive discussion about the slowdown in inflation over the past several months. Some of the policymakers likely held to the view that diminishing labour market slack should eventually put upward pressure on inflation. Others may have argued the FOMC should be cautious with respect to additional policy rate hikes unless the inflation data start to pick up.”

Since the statement various FOMC voters, namely Dudley, Kashkari, Evans and Kaplan, have indicated that they would be comfortable with an announcement regarding balance sheet normalisation being made at the September meeting, while non-voters (including Bullard) have also backed such a move.

In terms of broader policy issues, the most recent US CPI release (for July) was soft and saw CME Fed Fund futures pricing in a sub 35% chance of one further 25bps hike in 2017, with Kashkari (a noted dove)  arguing that the release gave the FOMC more scope to “wait and see” before hiking rates again. This was before permanent Fed voter, Bill Dudley, suggested that “if the economy evolves in line with expectations, I would expect to be in favour of doing another rate hike later this year.” This was followed by a strong retail sales dataset (with upwards revisions), which has led to CME Fed Fund futures pricing a circa 50% chance of a 25bps hike by year end (at the time of writing).

Barclays believe that “balance sheet normalization will likely start in September and the hurdle is quite high for the FOMC to deviate from what it has been signalling so far. We will also look for more detail on how concerned the FOMC is with the incoming data on inflation. Although we think concern has risen, we do not believe there is sufficient worry yet to derail a likely December rate hike.

Source: UBS, RanSquawk

"Subprime Is Contained" (& Other Evidence That "They Really Don't Know What They're Doing")

Authored by Jeffrey Snider via Alhambra Investment Partners,

Ben Bernanke, then Chairman of the Federal Reserve, told Congress in March 2007 that subprime was contained. He will rightfully be remembered in infamy for that, but that wasn’t the most egregious example of being wrong. Even putting it in those terms risks understating the problem and why it stubbornly lingers. Being really wrong is claiming that IOER will establish a floor for money market rates, and then finding out it actually doesn’t.

No, what policymakers did especially in the early crisis period was altogether worse; they demonstrated conclusively that though they shared this world with the rest of us, they inhabited and continue to inhabit a totally different planet.

Given the anniversary date and our human affinity for round numbers (ten years or a lost decade), there is a desire to revisit some of the worst of the list which happened just before August 9, 2007.

My favorite has always been Bill Dudley, as I recounted last at the ninth anniversary of nothing being done:

As far as the issue of material nonpublic information that shows worse problems than are in the newspapers, I’m not sure exactly how to characterize that because I guess I wouldn’t know how to characterize how bad the newspapers think these problems are. [Laughter] We’ve done quite a bit of work trying to identify some of the funding questions surrounding Bear Stearns, Countrywide, and some of the commercial paper programs. There is some strain, but so far it looks as though nothing is really imminent in those areas.” [emphasis added]

He spoke those words, recorded for posterity, on August 7, 2007, at the regular FOMC policy meeting. As noted earlier today, both Countrywide and the whole commercial paper market would be decimated really within hours from his “inspiring” confidence.

What really stands out is for Dudley to have been the one who said them, because as head of the Open Market Desk he had to be technically proficient in a way that the others could avoid (and why so often in its history policy discussions especially about these great things would often flow through whomever was the Open Market Desk chief at that moment in time). He proved still to be an empty suit like the rest, but he was always that much less of one. So if the best the Fed had to offer was so thoroughly unaware, is it any wonder what happened then and continues to happen now?

One day after Dudley’s private embarrassment, one Bank of England governor and future chief perhaps joined his level in the Hall of Fame of Famous Last Words. Meryn King remarked on August 8, 2007:

So far what we have seen is not a threat to the financial system. It’s not an international financial crisis.

He said these words at the behest of the ECB in front of the assembled press ostensibly to impart calm. Also noted earlier today, it was the European Central Bank that made the first crisis move the very next day in a record liquidity injection.

If officials didn’t realize what was happening monetarily, and they didn’t, there was obviously no way for them to predict what would happen economically. One follows the other, so if you think the monetary system is infected only with raw, mistaken emotion to be easily cleaned up by genius and effective policy intervention, then you will likewise believe the consequences to the real economy quite small and completely manageable.

In its bland policy statement that accompanied the August 7, 2007, policy meeting, the FOMC voted affirmatively (and quite purposefully) for this language:

Financial markets have been volatile in recent weeks, credit conditions have become tighter for some households and businesses, and the housing correction is ongoing. Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters, supported by solid growth in employment and incomes and a robust global economy. [emphasis added]

I could go on and on with these examples, but you get the point; the main of which is to paraphrase one religious sentiment. No Money, No Economy; Know Money, Know Economy.

These last ten years have proved beyond any doubt in gross empirical fashion policymakers and economists (redundant) don’t get either money or economy.

Goldman Is Troubled By The Fed's Growing Warnings About High Asset Prices

With both the S&P, and global stock markets, closing last week at new all time highs, it is safe to say that any and all warnings about "froth", and perhaps a bubble in the market, as Deutsche Bank characterized it last week have been ignored. And yet, as Goldman"s economist team writes over the weekend, the recent rise in warnings about "risk levels" and asset prices by Fed officials is concerning: "Fed officials have expressed greater concern about asset prices and financial stability risk recently, a change from their more relaxed view last fall. In particular, the minutes to the June FOMC meeting highlighted concern about high equity valuations and low volatility and drew a connection between potential overheating in the real economy and financial markets."

To underscore this point, here is a recap of recent Fed warnings about asset prices, which have increased significantly since the presidential election:

Janet Yellen, July 12, 2017

So in looking at asset prices and valuations, we try not to opine on whether they are correct or not correct. But as you asked what the potential spillovers or impacts on financial stability could be of asset price revaluations — my assessment of that is that as assets prices have moved up, we have not seen a substantial increase in borrowing based on those asset price movements. We have a financial system and banking system that is well capitalized and strong and I believe it is resilient.

FOMC Minutes, July 5, 2017

...in the assessment of a few participants equity prices were high when judged against standard valuation measures...  Some participants suggested that increased risk tolerance among investors might be
contributing to elevated asset prices more broadly; a few participants expressed concern that subdued market volatility, coupled with a low equity premium, could lead to a buildup of risks to financial stability... Several participants expressed concern that a substantial and sustained unemployment undershooting might make the economy more likely to experience financial instability or could lead to a sharp rise in inflation that would require a rapid policy tightening that, in turn, could raise the risk of an economic downturn.

Janet Yellen, June 27, 2017

Asset valuations are somewhat rich if you use some traditional metrics like price earnings ratios, but I wouldn"t try to comment on appropriate valuations, and those ratios out to depend on long-term interest rates.

John Williams, June 27, 2017

The stock market seems to be running pretty much on fumes... so something that clearly is a risk to the U S economy, some correction there, is something that we have to be prepared for and to respond to if it does happen. The U S economy still is doing — I think on fundamentals — is doing quite well. So I"m not worried about some kind of late- "90s, dot-corn bubble economy where a lot of the underpinnings were driven by the stock market.

Bill Dudley, June 23, 2017

Monetary policymakers need to take the evolution of financial conditions into consideration... For example. when financial conditions tighten sharply, this may mean that monetary policy may need to be tightened by less or even loosened. On the other hand, when financial conditions ease - as has been the case recently - this can provide additional impetus for the decision to continue to remove monetary policy accommodation.

Stanley Fischer, June 20, 2017

House prices are now high and rising in several countries, perhaps as a result of extended periods of low interest rates.

Janet Yellen, June 14, 2017

We"re not targeting financial conditions. We"re trying to set a path of the federal funds rate, but taking account of those factors and others that don"t show up in a financial conditions index.

Robert Kaplan, June 30, 2017

That"s not to say these imbalances won"t build and I am concerned that they may but if you ask me today I think right now it"s manageable, but I do think if there were some correction also in the markets. that could actually be a healthy thing.

Neel Kashkari, May 17, 2017

Monetary policy should be used only as a last resort to address asset prices, because the costs to the economy of such a policy response are potentially so large.

Eric Rosengren, May 8, 2017

While I am certainly not expecting such a scenario to occur, central bankers are charged with thinking about adverse risks to the economy. So current valuations in real estate are one such risk that I will continue to watch carefully.

Jerome Powell, January 7, 2017

With inflation under control. overheating has shown up in the form of financial excess. The current extended period of very low nominal rates calls for a high degree of vigilance against the buildup of risks to the stability of the financial system.

Perhaps their concern is due to the following Citi chart which we have discussed on numerous occasions, and which shows the "incredible" correlation between global central bank balance sheet size and market returns in recent years.

Or perhaps the Fed is not worried about stock prices at all, and while the recent commentary about asset valuations is notable, what the Fed is really concerned about is the recent pick up in the unemployment rate, something which as Bank of America noted last week, "there are no episodes in which unemployment rose a bit and remained stable at its natural employment rate. Rather, a recession has always followed."

Whatever the reason for this unexpected shift in rhetoric, here are some additional summary observations from Goldman, which while pointing out that such comments by Fed members are quite unorthodox, "Fed officials do appear more concerned about financial stability risks, and this could strengthen the case somewhat for tightening in the future."

• Traditionally, Fed officials have thought it wisest to respond to financial variables through their forecasted impact on inflation and employment. They have taken a more skeptical view of using the funds rate to lean against stretched valuations, though they have not closed that door entirely.


• We find that the Fed has largely followed these principles in practice, responding primarily not to valuation levels but rather to something like our FCI growth impulse, an estimate of the impact of recent changes in financial conditions on the growth outlook. Currently, the FCI growth impulse points to a healthy boost over the coming year, strengthening the case for further tightening.


• Leaving financial instability concerns out of the reaction function does not mean the policy stance has no role in reducing these risks. Our cross-country model of asset price busts shows that bust risk is substantially higher when the output gap is more positive, supporting the concern noted in the June minutes. This suggests that if the Fed is successful in containing overheating in the real economy, it can breathe at least a little easier about bubble risk.


• To what degree might the FOMC view financial stability risk as an independent argument for higher rates? Research by Fed economists suggests that because credit growth has been only moderate, the optimal response of the funds rate to financial instability risk is very small. But this could cut both ways: the economy’s reduced dependence on debt relative to the last two cycles also implies less risk that moderate tightening will lead to a crash.


• At this point, the FOMC does not need additional reasons for gradual further tightening, which a traditional reaction function based on the dual mandate suggests is already warranted. But Fed officials do appear more concerned about financial stability risks, and this could strengthen the case somewhat for tightening in the future.

The quandary would be promptly resolved, of course, if in the ongoing increasingly nebulous relationship between the Fed"s policy intentions and record high stock prices, which as Kevin Muir summarized simply as "stocks dare the Fed", and are "about to make Dudley, Fischer and Yellen extremely nervous", the Fed were to defy markets and unexpectedly hike rates once again, responding to the "dare", and making it clear that the Fed is indeed focused first and foremost to threats to financial stability resulting from market "froth" and "bubbles"... which incidentally it itself has created.

Yellen: "I Don't Believe We Will See Another Crisis In Our Lifetime"

If there was any confusion why the Fed intends to keep hiking rates, even in the face of negative economic data and disappearing inflation, it was put to rest over the past 2 days when not one, not two , not three, but four Fed speakers, including the three most important ones, made it clear that the Fed"s only intention at this point is to burst the asset bubble.

First there was SF Fed president John Williams who said that "there seems to be a priced-to-perfection attitude out there” and that the stock market rally "still seems to be running very much on fumes." Speaking to Australian TV, Williams added that "we are seeing some reach for yield, and some, maybe, excess risk-taking in the financial system with very low rates. As we move interest rates back to more-normal, I think that that will, people will pull back on that,

Then it was Fed vice chairman Stan Fischer"s turn, who while somewhat more diplomatic, delivered the same message: "the increase in prices of risky assets in most asset markets over the past six months points to a notable uptick in risk appetites.... Measures of earnings strength, such as the return on assets, continue to approach pre-crisis levels at most banks, although with interest rates being so low, the return on assets might be expected to have declined relative to their pre-crisis levels--and that fact is also a cause for concern."

Fischer then also said that the corporate sector is "notably leveraged", that it would be foolish to think that all risks have been eliminated, and called for "close monitoring" of rising risk appetites.

All this followed the statement by Bill Dudley, who many perceive as the Fed"s shadow chairman, who yesterday warned that rates will keep rising as long as financial conditions remain loose: "when financial conditions tighten sharply, this may mean that monetary policy may need to be tightened by less or even loosened.  On the other hand, when financial conditions ease—as has been the case recently—this can provide additional impetus for the decision to continue to remove monetary policy accommodation."

And finally, it was Yellen herself, who speaking in London acknowledged that some asset prices had become “somewhat rich" although like Fischer, she hedged that prices are fine... if only assumes record low rates in perpetuity:

“Asset valuations are somewhat rich if you use some traditional metrics like price earnings ratios, but I wouldn’t try to comment on appropriate valuations, and those ratios ought to depend on long-term interest rates,” she said.

It was not all doom and gloom.

Responding to a question on financial system stability, Yellen said post-crisis regulations (and $2.5 trillion in excess reserves which just happen to be fungible and give the banks the impression that they are safe) had made financial institutions much “safer and sounder.”

"Will I say there will never, ever be another financial crisis? No, probably that would be going too far. But I do think we’re much safer and I hope that it will not be in our lifetimes and I don’t believe it will."

Some were quick to compare this statement to Neville Chamberlain infamous - and very, very wrong - 1938 prediction of "peace in our time."

Others drew comparisons to a similar bold prediction by Ben Bernanke, who in 2014 predicted during one of his $250,000/hour speeches that "rates would not normalize during my lifetime."

Yet others, who noted Janet Yellen"s 70 years of age, asked her to "define our lifetime." But perhaps the most actionable question, if indeed valuations at 2420 on the S&P are somewhat rich, would the Fed be so kind as to disclose what level in the index does the central bank consider no longer rich.

As for Yellen tempting fate, today"s LOD market close may just be the beginning of how much more Janet Yellen has to live.

The Fed's Third Mandate Is Official

Authored by Kevin Muir via The Macro Tourist blog,

There has been a whole lot of ink spilled on the reason for the Fed’s recent break from data dependence. Many pundits believe the Federal Reserve’s hawkish guidance, even in the face of low inflation readings, is a partisan attempt by Yellen & Co. to derail the weak recovery. I don’t buy that argument. To think the FOMC board would leave rates easy for Obama or Hillary, but raise them for Trump is just foolish. The Fed might be incompetent, but they aren’t so blatantly biased.

I have speculated the Federal Reserve’s deviance from data dependence can better be explained by the adoption of a third mandate - financial conditions (Rejoining the Dark Side), but my theory involved a fair amount of reading in between the lines. Until now…

This morning, at a speech at the BIS Annual General Meeting, Bill Dudley came right out and stated unequivocally that the Federal Reserve was targeting financial conditions.

As I see it, financial conditions are a key transmission channel of monetary policy because they affect households’ and firms’ saving and investment plans and thus influence economic activity and the economic outlook. If the response of financial conditions to changes in short-term interest rates were rigid and predictable, then there would be no need to pay such close attention to financial conditions. But, as we all know, the linkage is in fact quite loose and variable.

For example, during the mid-2000s, financial conditions failed to tighten even as the Federal Reserve pushed its federal funds rate target up from 1 percent to 5¼ percent. Conversely, at the height of the crisis, financial conditions tightened sharply even as the Federal Reserve aggressively pushed its federal funds rate target down toward zero. As a result, monetary policymakers need to take the evolution of financial conditions into consideration. For example, when financial conditions tighten sharply, this may mean that monetary policy may need to be tightened by less or even loosened. On the other hand, when financial conditions ease — as has been the case recently — this can provide additional impetus for the decision to continue to remove monetary policy accommodation.

There is no ambiguity there. That’s as clear as Central Bankers get. Dudley, who is generally considered the third most influential FOMC board member (behind Yellen and Fischer), is telling you plainly - as long as financial conditions keep easing (and employment doesn’t collapse), the Fed will keep raising.

Look closely at the last line of Dudley’s quote, “when financial conditions ease — as has been the case recently—this can provide additional impetus for the decision to continue to remove monetary policy accommodation.”

The FOMC wants stocks to stop rising, and they will keep raising rates until they stop. Although Neel Kashkari has gone rogue, as one pundit so eloquently put it, the rest of the board are all on the same page.

This weekend the San Francisco Federal Reserve President John Williams made a speech in Australia that was surprisingly hawkish:

I once had a T-shirt printed up that reminded folks that the decisions we make at the Fed are “data-driven,” and they are. Although we live in a hyper-political era, the Fed is strictly apolitical…and as one of America’s great exports, Lady Gaga, would say, we were “born this way.” Our enterprise is unique within the U.S. government in both function and structure, and our design allows us to make decisions independent of short-term political influence. We base our decisions on what’s best for the long-term health of the economy, rather than “living for today.”

The U.S. Congress has mandated that our job is to keep the economy stable and on track, with a focus on two big goals: maximum employment and price stability. We want everyone who wants a job to be able to find one and for inflation to average 2 percent per year over the long run.

Today, the U.S. economy is about as close to these goals as we’ve ever been. Among other things, we’ve fully recovered from the recession.

When it comes to our employment goal, this is typically viewed in terms of the unemployment rate relative to the natural rate of unemployment—by this I mean the level consistent with an economy that is running neither too hot nor too cold. We can’t know precisely where this magic number is, but I put it at about 4¾ percent.

Today, the U.S. unemployment rate is 4.3 percent—meaning that we’ve not only reached the full employment mark, we’ve exceeded it by a fair amount. Given the strong job growth we’ve been seeing in the United States, I expect the unemployment rate to edge down a bit further and remain a little above 4 percent through next year.

Meanwhile, inflation has been running somewhat below the Fed’s goal of 2 percent for the past few years. In the past, this low rate of inflation was the product of a number of factors—the recession and the strength of the U.S. dollar being the two main ones. Recently, some special transitory factors have being pulling inflation down. But with some of these factors now waning and with the economy doing well, I expect we’ll reach our 2 percent goal sometime next year.

Now, I’d love to be able to tell you that the news is all rosy and that our work here is done. Unfortunately, they don’t call economics “the dismal science” for nothing. I’m paid to consider what potholes may be dotting the road ahead.

For starters, the very strong labor market actually carries with it the risk of the economy exceeding its safe speed limit and overheating, which could eventually undermine the sustainability of the expansion.

When you’re docking a boat in Sydney Harbour, the San Francisco Bay, or elsewhere, you don’t run it in fast towards shore and hope you can reverse the engine hard later on. That looks cool in a James Bond movie, but in the real world it relies on everything going perfectly and can easily run afoul. Instead, the cardinal rule of docking is: Never approach a dock any faster than you’re willing to hit it. Similarly, in achieving sustainable growth, it is better to close in on the target carefully and avoid substantial overshooting.

What this means is that we do not want our economy to run too hot or too cold. Like Goldilocks, we want our porridge to be just right.

During the recession and recovery, jump-starting and speeding the recovery required historically low interest rates. Today, interest rates in the United States remain low—and this is even true after the most recent Fed action, which I’ll get to in a moment.

I’m sometimes asked why we don’t just leave things as they are and not raise interest rates. After all, if things are going well, why change? The answer is that gradually raising interest rates to bring monetary policy back to normal helps us keep the economy growing at a rate that can be sustained for a longer time.

If we delay too long, the economy will eventually overheat, causing inflation or some other problem. At some point, that would put us in the position of having to quickly reverse course to slow the economy. That risks stalling the expansion and setting us back into recession.

My goal is to keep the economic expansion on a sound footing that can be sustained for as long as possible. The last thing any of us want is to undermine the hard-won gains we’ve made since the dark days of 2008 and 2009, when it seemed like the U.S. and world economies were on the verge of collapse.

Therefore, we’re in the process of normalization. At our June meeting, the FOMC undertook the second ¼ percentage point increase in our main policy interest rate this year. And we announced that we expect that economic conditions will warrant further gradual increases in the future.

Re-read the paragraph about docking in a harbour. These are not the words of a Fed President willing to let growth run. He is on the same page as Dudley.

It is stunning that markets are not taking these words more seriously. I don’t know if it was too many times crying wolf, but we have hit a point where markets are ignoring extremely hawkish rhetoric from Fed officials.

The Fed seems to have lost credibility, and I fear that when the market finally realizes the Fed might in fact follow words with deeds, an abrupt repricing of financial assets will be on deck.

Here Is The Latest Breakdown Of Fed Hawks And Doves

Ahead of today"s FOMC minutes, UBS reminds us that there has been substantial turnover on the FOMC, and so the Swiss bank has updated its periodic commentary on FOMC participants, as well as its popular "hawk-dove" chart.

While many of the actors are well-known, there are some unknowns and unfamiliar faces, with more to come. The biggest unknowns are Raphael Bostic, the brand new President in Atlanta and how the Richmond Fed will factor into the debate after Jeffrey Lacker"s departure. In addition, with three vacancies on the Board and Chair Yellen and Vice Chair Fischer"s terms ending early next year, there will be considerable turnover.

Here is the full breakdown of the Fed"s latest "nest", from UBS" Seth Carpenter.

The new scale

First, Raphael Bostic, the new president of the Federal Reserve Bank of Atlanta has not established a track record to judge. That said, Bostic is a very smart, well-trained economist, who is comfortable mixing theory and empirical work, so a good guess is that he will not initially be at either extreme. Also uncertain is the role of the Federal Reserve Bank of Richmond. Jeff Lacker resigned after acknowledging leaking FOMC information in 2012. The first Vice President of the Bank gets to take his place, but it is hard to know how that will play out. Richmond is not a voting member this year, so the distinction is slightly less critical.

Among the hawks on our scale, the easiest calls are Esther George (FRB-Kansas City) and Patrick Harker (FRB-Philadelphia). Both have been consistently hawkish in tone. Loretta Mester (FRB-Cleveland) is a career Fed economist, having worked for Charlie Plosser (a noted hawk) at the Philadelphia Fed. She is less doctrinally hawkish than her old boss and takes a nuanced view of the data, although she usually interprets  them with something of a hawkish tilt. Eric Rosengren (FRB-Boston) has become hawkish in recent years, motivated less by inflation fears than by financial stability concerns. His policy prescriptions have become consistently to the hawkish side of the Committee.

We see a large set of centrists on the Committee, large enough to shade some participants to one side or the other.

• John Williams (FRB-San Francisco) and Stan Fischer (Board) are academic-minded economists  who have been slightly ahead of the Chair in calling for a removal of accommodation. They share a standard macroeconomic framework for policy with the Chair, so the difference is one of degree rather than kind.


• Rob Kaplan (FRB-Dallas) is a relative newcomer who has not staked out positions that are particularly out of the mainstream.


• Chair Yellen should rightfully be seen as the center of the Committee. Bill Dudley (FRB-New York) is ex-officio Vice Chair of the FOMC. In practice, the Chair and the Vice Chair along with the Vice Chair of the Board plan policy strategy together, putting Dudley in the center, as well. Jay Powell (Board) has accumulated deep experience and expertise during his tenure on the Board. His views have become more fully articulated, but he has remained in the center.


• Charlie Evans (FRB-Chicago) is an academic-minded economist who had consistently stressed the undershooting of the inflation target and a lack of fear of a symmetric overshooting. This stance earned him a reputation as an extreme dove, but in the event, inflation ran below the FOMC"s target for several years; yet another example of the conflation of preferences with a policymaker"s economic outlook.


• Lael Brainard (Board) was an outspoken advocate last year for patience in removing accommodation, particularly in light of international developments. Her dovishness seems to come from a risk-management perspective.


• Neel Kashkari (FRB-Minneapolis) is another relatively recent addition to the FOMC. He initially seemed reluctant to stake out strong views on policy, but in the last several months has become an outspoken dove, dissenting against a rate hike.


• Jim Bullard (FRB-St. Louis) is hard to place on the continuum (a statement that we suspect he would approve). He has called for no more interest rate hikes for the foreseeable future, a position that seems to be at the extreme of dovishness. But, he sees the world as being in one of potentially many equilibria, and allows for the possibility that the equilibrium could shift requiring either a tightening in policy or potentially an easing in policy.

A final note on voting. We have separated voters from non-voters, as is customary. One should keep in mind, however, that in practice, all FOMC participants take part in the debate. The recording of the vote and number of dissents matters, but the FOMC has been run as a consensus-driven body for a long time, and the distinction between voter and non-voter is typically overstated.

And visually:

Gary Cohn Is The Leading Candidate To Replace Janet Yellen: Beacon

Several months ago, when it was still conventional wisdom that Trump wanted to replace Janet Yellen - at least until Trump"s famous WSJ interview in which he flipped on this and various other issues - with a hawk once her tenure runs out in 2018, the financial punditry was busy coming up with potential replacement names, a practice which gradually faded away once it emerged that Trump may well keep Yellen.

That changed today when in a note by Beacon Policy Advisors, a new name emerged which according to CNBC has set Wall Street abuzz. That name is that of former Goldman COO and current Trump National Economic Council advisor Gary Cohn.

"The buzz among those who claim Cohn confides in them is that he would like to eventually replace" Yellen, assuming Trump decides to move in a different direction when the chair"s term ends in early February, Beacon Policy Advisors said in its daily report for clients Tuesday, cited by CNBC"s Jeff Cox.

"On paper, Cohn likely meets Trump"s expected top two requirements for a Fed chair candidate," the Beacon analysis said, specifically citing Cohn"s advocacy for deregulation and his likelihood to keep interest rates low as Trump seeks to implement his pro-growth economic policies.

As Cox notes, while during his presidential campaign Trump openly criticized Yellen, accusing her of keeping interest rates low and using monetary stimulus to prop up the economy under Obama, "he"s been relatively mum about Yellen since taking office in January. He also has emphasized the need for a cheap dollar and low interest rates as the economy seeks escape velocity from an extended period of low growth."

"If Trump wants rates to be as low as possible, (Yellen"s) still the best choice," said Greg Valliere, chief global strategist at Horizon Investments and a widely followed expert on the Wall Street-Washington connection. "In my career, I"ve never seen a president who favored higher interest rates. That"s pretty unusual."

To be sure, who better to do that than the former Goldman Sachs #2. In many ways it would be a logical progression: with Goldman alumni already in charge of many central banks, either directly or indirectly - former Goldman MD Bill Dudley runs the New York Fed, while former Goldmanites run the BOE and ECB - it would be perfectly fitting that Trump would complete his metamorphosis to an establishment politician by appointing a Goldman banker to run the Fed directly.

According to sources cited by CNBC Cohn is among the top contenders, along with former Fed Governor Kevin Warsh and FDIC Vice Chair Thomas Hoenig, to replace Yellen.

"He"s the leading contender," said Christopher Whalen, an insider in the banking world and currently head of Whalen Global Advisors. "Every Fed chairman in recent memory going back even to (Paul) Volcker went through the White House in one way or the other. ... It would certainly make sense." Whalen said he personally favors Warsh for the position but believes Cohn "wouldn"t be a bad choice." Whalen thinks Cohn would "have no choice" but to advocate for keeping rates low during what Whalen believes will be an economic slowdown ahead.

A White House spokeswoman said the chatter was "entirely speculation" and called the Beacon report and any others "inaccurate."

Cox notes that there are several negative considerations to picking Cohn.

Most notably, the president is relying on Cohn to usher his economic agenda through Congress and help with the implementation, particularly regarding tax reform. If Trump can"t get a tax plan passed by next February, that would make it tougher to let go of Cohn. Moreover, CNBC recently reported that Cohn actually may have pushed Trump to keep Yellen on board. However, it"s not clear whether Yellen, 70, even would want to be given another them.

Should Yellen would want to leave, however, Cohn, along with Hoenig, Warsh and John Taylor, "would certainly be on the short list," Valliere said. "Cohn would be an interesting pick, though there would be some concern that he was politicized and the markets could view him with some suspicion that he is too close a political ally with Trump."

Then there"s the obvious Goldman connection. While Cox correctly notes that Critics "have ripped into Trump for perpetuating the "Government Sachs" culture in Washington where so many of the firm"s principals have found their way into high levels of government" that does not appear to be bothering Trump much in recent weeks.

Beacon concluded that "it remains unclear though, especially this many months in advance of Yellen"s term ending, as to whether there will be sufficient support for Cohn for this role within the West Wing at that time and whether he could even get confirmed given his lack of conservative credentials and academic background, not to mention his prominent ties to Goldman Sachs."

However, the fact that this particular trial balloon is being floated so early to set the stage, likely implies that the probability of a former Goldman president becoming Fed chair is far higher than most would suspect.

RBC: "The Fed Is Now Forced To Walk Back The Market's Incorrect Dovish Interpretation"

First, it was Goldman"s chief economist Jan Hatzius, who in a fascinating note explained why the market has totally misread the Fed"s tightening intentions, claiming the market surge is "not the reaction the Fed wanted", alleging that the market"s dramatic "easing" response was "not the outcome the FOMC aimed for" and concluding that "at the margin, it will likely make them more inclined to tighten policy", a polite way of saying that the Fed may now not be behind the inflationary curve, but that it is certainly behind when it comes to "explaining" to the market that it has run ahead of itself.

Now, in a follow up note, RBC"s head of cross-asset strategy makes the exact same point as Goldman, and warns that "the Fed will now view the market response as an ‘overshoot,’ and will perversely be forced to ‘walk-back’ the ‘incorrect’ dovish market interpretation with more hawkish rhetoric in coming weeks / months that will again whipsaw the rates market and likely-drive cross-asset vol higher."

And since Goldman still has a direct hotline, both literal and symbolic, to former Goldman employee Bill Dudley who is in charge of the NY Fed, it would not be surprising if during the Fed"s next public appearance, an FOMC member makes it very clear that having both of its core original mandates, inflation and emloyment, supposedly under control, it is now taking on the 3rd one - preemptive market stability, by making sure that risk assets are halted in their bubbly tracks.

Below are the key excerpts from today"s note by RBC"s Charlie McElliggott:

FED CREATES MORE ROPE TO HANG THEMSELVES WITH

#HOTTAKES:

• Despite hiking, the Fed missed a major opportunity to play “catch-up” without disrupting the market—as price-action showed that investors were clearly prepared for ‘hawkish’ outcomes.


• Instead, the FOMC / Yellen’s commentary (in light of the above ‘hawkish positioning’ dynamic) actually created EASIER / LOOSER financial conditions, with real rates collapsing lower on the session.  This will make the eventual exit-process that much more difficult—thus, “more rope to hang themselves with.”


• With Yellen noting that the Fed intended to keep its policy accommodative for “some time”—in conjunction with the overly simplistic market take on the lack of movement in the average dot (FAR more nuanced than that) and the ‘hawkish’ buy-side positioning--the Fed also created significant (under)performance frustration across many strategies yesterday, with the exception of a 2 standard deviation ‘+++’ day for many risk-parity portfolios (which essentially run ‘short convexity’ long only cross-asset books, which are now likely to be in-process of ‘levering-up’ off of the ‘vol crush’).


• For the above reasons, I believe the Fed will now view the market response as an ‘overshoot,’ and will perversely be forced to ‘walk-back’ the ‘incorrect’ dovish market interpretation with more hawkish rhetoric in coming weeks / months that will again whipsaw the rates market and likely-drive cross-asset vol higher.

COMMENTARY:

So the Fed hiked….and nominal rates gapped lower, breakevens traded higher, real rates collapsed, and financial conditions LOOSENED.  Why?  To me, the moves were largely positioning-related, being caught wrong-footed inherently with regards to ‘expectations.’  I do not believe the Fed intended this to be a dovish message, and they are going to have to clarify this to the market in coming weeks, in turn risking / creating more volatility.  There is a fixed-income short / ED$ steepener to be laid-back-out soon. 

To sum up the ‘by-and-large’ client reaction to yesterday’s post-Fed response (with a touch of relief from the Dutch election sprinkled-in) on a scale of 1 to 10, I’d say the buy-side gave it a “MEHHH.”  Optically and absolutely, yesterday WAS of course a day of positive performance for many funds long risky assets, considering SPX +20 handles, EEM +2.6% (+2 SD move), IWM +1.6% (+2 SD move), HYG +1.4% (+3 SD move), LQD +0.9% (+2.6 SD move) et cetera. 

Instead though, it felt ‘empty’ or like a missed performance opportunity for many, because despite your longs doing ‘okay,’ many of your shorts were up just as much, if-not-more.  And regarding the longs, the stuff that did ‘really well’ yesterday is generally underweighted OR in many cases, has recently been pared-back (i.e. cyclical beta equities).  Case-in-point, look at this example within the equities space:

• HF VIP Longs + 0.7% against HF VIP Shorts +0.7%


• High HF Concentration +0.9% against Low HF Concentration +1.0%


• MF Overweights +0.6% against MF Underweights +1.0%

Ugh.

This was an interesting rally because it looked like the old “QE”- varietal, where the interpretation of anything ‘dovish’ (in this case ironically it was a dovish HIKE via a simplified read basically that "unch on median / average dot" countered the recently hawkish momentum / rhetoric / data) actually sent UST"s sharply higher (TY largest ‘up’ day since June ’16) / rates sharply lower / USD sharply lower (BBDXY a -3 SD move lower and largest ‘down’ day since July ’16).  Real rates lower = easier financial conditions = Risk-on, Vol smoked = ‘short convexity’ vol trigger strategies likely driving mechanical re-levering.

The real news to me in the Fed message was two-fold:

• First, the dot shift was beautifully spotted by Mark Orlsey and Tom Porcelli going-into the event.  Looking at the simple scale of the absolute move in the average- or median- dot simply doesn’t ‘cut it’ in the case of “what is to come”—it is far more nuanced.  As such, the takeaway I think the market has initially-missed was the fact that the marginal dot ‘shift higher’ came from the bottom of the plot—i.e. IT WAS THE MOST DOVISH FED MEMBERS WHO UPPED THEIR DOTS.  This dynamic is going to have to be ‘trued-up’ in coming months considering the data trajectory (new 5 year highs in Bloomberg US Econ Surprise Index yday) and is likely to be a source of interest rate-driven cross-asset volatility.


• The second notable takeaway from yesterday was Yellen’s very modest backing-away from prior comments made from Fed officials regarding an absolute-level FF rate (1.00%) acting as a ‘trigger’ for cessation of reinvestments to shrink their balance sheet.  This is important bc again, Fed members have made this a point of focus going-forward, and their time-horizon window is shrinking now.  From a markets perspective within the mortgage space, losing the ‘buyer of last resort’ (into the daily Fed buybacks) will cause ripples, because if rates are going higher against you as a MBS trader—which is inherently a negatively convex product—you HAVE TO hedge by hitting TY.  This is a down-the-road discussion (now a 2018 story), but again will be a source of rate volatility in the future that could be ‘disorderly.’

Regardless of the medium- / long- term potentials…as such with the rates collapse lower on the day, duration sensitive equities were a large part of the equities leadership—e.g. defensives, divy yielders, low vol types like reits, utes, telcos (outside of energy sector with crude"s relief rally), while mega-allocations in tech, consumer discretionary and financials were, relatively speaking, "dead weight" and lagged index.  Of course too, the other leadership driver in stocks was the ‘reflation stuff’ that’s been ‘getting pitched’ over the past month like steels, metals & mining, oil services, E&Ps, high beta materials and industrials etc.  That stings for the majority of equity funds with regards to their current sector allocations, long ‘secular growth’ after reducing a fair bit of their "cyclical beta"‎ / value exposure in 1Q17. Much of yesterday’s leadership was curious ‘late cycle’ stuff, which o/p ‘early cycle’ by an astounding~140bps:

Obviously, the above dynamic is especially frustrating for many equity HF"s.   When you see the broad SPX tape + 0.8%, Russell 2k +1.6 and R3k‎ +0.9% but as a long / short you were only able to eek-out 40bps to 50bps simply due to you net long exposure, it stinks.  Even worse, mkt neutrals strats which simply don"t work in "gap higher" tapes. ‎

‎Bigger picture macro, the rates move spanked fixed-income shorts, while the Dollar crush crunched longs (especially against GBP, EUR and select EM).  Another “ouchy.”  And think about the initial "trump reflation" worldview themes from 4Q16 where it was Emerging Markets that was viewed as the "biggest loser"...and now is the "high flyer" (EEM +12.3% YTD) as the protectionist rhetoric is ‘walked-back’ (Navarro comments yday) and some thinking (benevolently) that US growth is soon to be the "higher water which will raise all boats."  Long EM over DM is now one of the most popular strategy calls going, FWIW.

But was yesterday really about US growth—was that really the case‎?  I"d say that in light of the recent ‘trend trades’ and positioning dynamics, a day where you see fixed-income, (long) duration-sensitives, defensives, low vol, late cycle and EM leadership ‘run higher,’ it speaks to folks looking to buy the "stuff that"s been left behind" in a classic “PM exposure grab” style, yelling to his trader "find me some cheap stuff!"  More "lottery ticket" mode than anything else, as evidenced by GDXJ (Jr Gold Miners ETF) finishing +11.5% higher on the day yesterday--a +3.1 SD-move. ALL OF THE LULZ.

As far as the current framework / narrative we’ve been operating under since midyear ’16, it shouldn"t be lost on anybody that this wasn"t a “higher growth = higher nominal rates = equities rally" which has obviously been the story of all global markets since secular lows for rates were put in last summer.  It was instead an ‘easier conditions,’ central bank driven rally of old QE-era.  As described above, this felt a lot more like “...greedy, not growth-y.”  

I think there"s an important message in there.

RBC US ECON TEAM SHOWS 2017 DOT SHIFT WAS ACTUALLY ‘HAWKISH’:

MARK ORSLEY SHOWS 2018 DOT SHIFT WAS ACTUALLY ‘HAWKISH’ / HIGHER AS WELL: