The Weekly T Report: The Fed and Falling Knives and EUROPE
Why should the Fed catch a falling knife?
Every trader is told not to catch a falling knife. The image is clear, reaching out your hand and being cut by a blade, and then the blade clattering to the floor, with nothing to show for your effort but a bloody hand.
Without a doubt, traders are not supposed to catch a falling knife, but yet we expect the Fed to. We expect the Fed and other central bankers only to catch falling knives. The economy isn’t bad enough for the Fed to act. The Fed will need to see more weakness before they act. Don’t catch a falling knife. The flaw in logic appears obvious to me. Why should we tell the Fed to wait until the knife is falling.
It is obvious to everyone that the “economic” knife is hanging over the edge of the table and is at serious risk of falling. Why not nudge the knife back on to the table before it falls? Once the knife falls, confidence is shattered. Plans to expand get put on hold. Any stimulus is wasted on rebuilding confidence. Acting earlier, while there is still some confidence may have a far bigger impact.
Ben does not want to be the Fed Chairman who leads us into another depression because he didn’t follow his own teachings. He believes, rightfully or not, that the depression was caused by central bankers doing too little, too late. The key here isn’t just too little it is the “too late” element. Even his academic research realizes that waiting too late is almost as dangerous as not acting at all. In the old “vote early and often” mode, I believe he is aggressively lobbying the voting members to get on board with another round before its too late.
The Fed isn’t out of ammunition, just out of new weapons
Somehow, the market has latched onto the idea that the fed is out of ammunition. That they are running out of bullets and have to save their ammunition for one last shot. That makes no sense. They are running out of weapons. They are pretty much down to printing money and buying stuff with that money, that is their only weapon. It might not be a great weapon, and the market might have defenses against that weapon, but there is no indication that the Fed can’t keep firing it over and over. There doesn’t seem to be much of a limit on how much money they can print. The Fed has an unlimited amount of ammunition and if firing the QE weapon doesn’t work this time, they can reload and do it again. Obviously they would prefer that it works, but there is no reason for them to wait to see the white’s of their eyes if they think by that point it is too late to win.
I’m not sure what the Fed will do, but I expect it to be at least some form of operation twist, and if a new QE is not announced, there will be discussion about the options that are on the table to provide additional “expectations” comfort.
Greek Elections Don’t Matter Much
In spite of all the hand wringing and the greatest glut of global reporters in Greece, the elections don’t matter that much. If fact, a Syriza victory might be the best outcome. Germany and the ECB have finally figured out what we have known for awhile – that a Grexit would make Lehman look like child’s play on Zerohedge. The market is becoming just too aware of the dangers of letting Greece go when even the USA Today knows the ugly scenarios. Germany, France, and the ECB would lose too much on existing commitments made to Greece and the contagion risk from commitments already made to other countries is too real. Germany and France are already at risk of 100’s of billions of losses from existing funding agreements. They are far more likely to put a few billion more at risk to avoid triggering those claims.
The Spanish Bailout Is a Big Deal
We still don’t have the details, but the mindset behind that deal is different than any past EU rescue and it is possible it will be used as a template. Our thoughts on it can be read in an earlier T Report and here on Business Insider.
There has been a lot of confusion about how the EFSF funds itself, and how the ESM, assuming it gets put in place, would work. This piece explains how the ESM and EFSF funding works and why the myth that Italy borrows at 6% to lend at 3% is wrong, and why even the idea that Spain is lending to itself isn’t quite true – particularly for EFSF.
JPM
Not much left to say. Looks like the worst is over and soon we will find out just how exaggerated the losses were. Still no details, but if the May 10th conference call was the start of the serious decline in JPM, the testimony this week is likely to be the start of a real re-building in value.
Enjoy another Short Weekend L
Not sure there is much to do between now and Sunday, but once again it seems like far too many people will be stuck watching futures Sunday night. I don’t know the outcome nor what the reaction will be, but just like last week, digging past the headlines and thinking about the likely next steps, is key. Last Sunday started with a big rally that was completely reversed before the close on Monday, only to finish up decently on the week. Spanish bond yields were higher on the week, yet Spanish stocks did incredibly well.
In the meantime, as we continue to wait for central bank intervention here is the Central Bank Scorecard we put together ahead of the ECB decision on June 6th. If anything, the actual score keeps getting increased, as Bank of England finally announced more QE, and I expect the score to get run up a bit, early next week.