PANCAKING THE CURVE…

If you’re trying to visualize today’s move from the Fed then look no further than the Fed Funds Futures curve.  Just 24 hours ago the curve was a full 25 bps higher than today.  This move was the equivalent of a rate cut.  Unfortunately, rate cuts stopped working about 2 years ago….

Nonetheless, the change in the curve shows just how much expectations have changed in 24 hours.   The Fed has essentially pancaked the yield curve:

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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Comments

  1. At least this will be an interesting economics experiment: stimulate inflation expections (or in a BSR, stimulate debt reduction expectations) or create more FUD forcing more consumer retrenchment?

  2. This would be easier to see if, as was taught in stats 101, the two graphs had the same x-axis.

  3. We indeed live in interesting times! Since as many say, once rates are zero monetary policy pushes on a strimg, the rocket science bersion of ZIRP will be to extend the promise for an extra year at each FED meeting!

    As CR hinted in a recent post, the economy must be really sh*ty for the FED to have statically promise ZIRP for another three years! Does This plus the ECB forced to monetize debts means long gold? Hint: look at a chart for gld for today.

    • Ok. I went long gold and gold miners via call leaps. I bought the Jan 18 165 GLD call. Put about 2.5% of my portfolio to leverage into approximately 20% long gold. Also bought GDX 55 calls, same expiration date. Put about 1% of my portfolio to leverage approximately into a 6% long large gold miners. Expensive options! THIS IS NOT INVESTMENT ADVICE THESE OPTIONS WILL LOOSE OVER 80% OF THEIR VALUE IF GOLD DIPS UNDER 1500 WHICH IS ENTIRELY LIKELY TO HAPPEN. GOLD IS A VERY VOLATILE INVESTMENT. OPTIONS ON GOLD/GOLD MINERS ARE EVEN MORE SO! AS FAR AS I AM CONCERNED, I AM TAKING A BET IN WHICH I MAY LOOSE VIRTUALLY 100% OF THE OPTIONS PREMIUM.

      • Dangerous to go long at this prices but is a small position and you’re prepared to lose it. I would get the other side of the bet anytime, also I don’t like naked option buying (less even LEAPS, even if the premiums have fallen in the last months) in this environment tbh (ratio spreads to hedge against theta at least), even with lower volatility that could change very fast.

        In the long term this means inflation is falling (towards deflation), this is far more important to fundamental price trends than any short term. Asset-price deflation is the new trend. But I think you may get time in a short timeframe to sell, however I don’t think it will be very long until new leg down and now I’m starting to be safer than ever.

    • @ Octavio-

      GMO has an interesting piece on Gold/EM/India
      Rosie always says…the 10 yr is a function of rates. It should bounce around again in 2012 from 2-4 + or -.

      • Thanks. I read that last week? It says move in gold is little guys in China and India buying which has pluses and minuses for being long gold.. IMHO, the bet in gold can go either way. If we get a 2008 like crisis, gold will go down with everything else. I am just trying to protect myself from the alternate outcome in what Gross calls a binomial world.

      • Btw, I agree with your take on the 10 year. As Faber says, stocks are a good inflation hedge. I just don’t see stocks getting anywhere this year. They may bounce up and down quite a bit but I agree with Husman they are currently priced to yield under 5% annual return in the next 10 years. Better entry points should develop. With gold I was looking for a suitable entry point. Of course, close to 1500 would have been better but I didn’t see improved odds for gold till Benny’s move today. If you tell people the return on paper money for the next 3 years is going to be zero, what do you think people will think about putting their money in hard currency when they are told there is zero opportunity cost! Also, the Chinise may start saving even more in gold vis-a-vis RE which they have now confirmed it sucks as an investment these days. Highly illiquid and you cannot take it with you.

        • Octavio-

          My main bearish indicator just turned down.

          1. My dry cleaner- at the bottom of the market he said it would never recover for another 10 years. Yesterday he said he thinks it’s going to be a good year in the market.

  4. Are the FED’s good intentions really much different than its support of the housing bubble? Sounds and feels like more bubble bait.

  5. There wasn’t much change in the near term curve (as it is already extremely flat). The only real drop was way out there in 2014. I think the impact of the Fed statement can be more easily seen in the 5yr yield, which dropped 10 bps.

  6. Very dangerous stuff.Each time they do this they essentially coerce the chasing of yield and we know the way that ends up.A trainwreck for somebody .

  7. So it looks like LA may indeed get his recession after all. By the time it is confirmed. The FED will already have promised ZIRP ALL THE WAY TO THE END OF 2020!:-)