Wednesday 15, December 2021

FOMC meeting today

Commentators usually avoid making predictions. Markets have an uncanny ability to make fools of all of us, arguably, the smartest are the ones with most to lose.

Anyway, Alex Manzara, who I respect hugely, has just come out and made a clear and timely prediction about the trickies market of all: US Treasuries (well, the whol USD risk-free yield curve, really).

FOMC today. Heres what I think is going to happen. At 2pm when the announcement and SEP are released, there will be a knee-jerk reaction lower in near and red ED contracts because the dots are going higher as are the inflation projections, even IF the taper is accelerated. However, at the 2:30 presser Powell will temper the hawkishness and by the end of the day the curve will be steeper, long rates will be higher, short end rates will be lower, and front end vol will be much lower.

For my two-pennyworth, it seems obvious that the Fed doesn’t want to let the curve invert, and so will not do anything to depress long-end rates any more than they are are already depressed. Banks (traditionally) make money by funding at the short end and lending at the long end, so will be pressing Powell to do something about the recent flattening we’ve seen.

There are many players in this market, but keeping the short end pinned to the floor will suit most of them. As Manzara points out, the Fed cannot continue to be the marginal buyer for ever, and if that is not to crash the equity market there will have to be ultra-cheap repo rates to encourage private buyers to take on the role of buying these bonds. It’s looking as though China wants to pass on the baton.

The great thing about this prediction, is that we’ll know if he was right this time tomorrow.

Read more here. He doesn’t have a mailing list, but the blog as an RSS feed, which you can use to drive one.

XOM

The article entitled Exxon Mobil: Placing A Bet Against Bill Gates makes the case that even in the most pessimistic scenario imaginable, Exxon will still be worth investing in now. This is because it is inconceivable that oil will cease to be an important source of energy in thirty years time. Nobody is saying it will be the most important source, or that renewables will not have eaten some of Exxon’s lunch. But to assume that Exxon will have gone the way of some whale oil producer from the late 19th century is simply to misunderstand how much oil we need and how difficult it will be to do without the stuff.

In a way, the push for renewables improves the outlook for a company like Exxon. Like a tabacco company in the 1980’s when the writing was on the wall, new entrants will simply not bother. What MIT grad now wants to start up a new oil company to take on $XOM?

Well, this is not investment advice, and the general guidance I can give is that when a thesis is as compelling as this, it’s already in the price, so you should do the opposite of what you might ‘rationally’ do.

In case you were convinced that we’ll all be using 100% renewable energy in five years, read this for an opinion which might challenge this!

Wrap

The Fed announced it would stop buying Treasuries by March. This is not really a surprise. It seemed to admit that it had got inflation completely wrong last year, but that it was totally confident that its forecast for next year was spot on, and that monetary policy had it under control. It predicted that unemployment might drop to 3.2%, which feels like a number below the natural rate, if you believe in that mumbo jumbo.

Anyway, because nothing very dramatic was said, the equity market rallied. It almost always does.

The dollar was generally down. DX at 96.3. Turkish Lira was down again. US Treasuries were down, and equities were up, presumably relieved that the Fed wasn’t going to do anything it had not already signalled.

It seems to me that usually the day following the FOMC meeting is the one where the market really takes in what has been said.

In other news, Nancy Pelosi signalled her opposition to a proposal to limit stock trading by members of Congress and their spouces and close associates. I think this is what is called a “dog bites man” story.