Market Thinking

making sense of the narrative

All the (Fed) President’s men?

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The job vacancies created by the ‘unexpected early retirements’ of two Fed Presidents seen as Hawkish on Monetary Policy may well be seen as an important catalyst for US fixed income and currency traders, but history may instead see these changes as an important catalyst in a populist resurgence and a pushback against Crony Capitalism and the behaviour of the 1%

On its own, the retirement of Boston Fed President Eric Rosegreen for apparently trading in REITs (by the looks of it on margin) would be a bad enough blow for the integrity of the Federal Reserve and another example of the ‘do as I say not as I do’ reputation of the US’s political and financial elites, but it was arguably far less egregious than the actions of another Fed Governor (and voting member of the Federal Reserve) Dallas Fed President Robert Kaplan who was also forced to resign also announced his retirement a day later on discovery of a series of multi-million dollar speculative trades in Financial Futures. As blog Wall Street on Parade point out, in an admirably well researched article, Fed Governor Kaplan traded like a Hedge Fund Kingpin despite there notionally being a whole system of safeguards to prevent those who are in a position of having privileged information from doing exactly this.

To lose one Fed President for inappropriate trading is unfortunate, to lose two looks like carelessness

With apologies to Oscar Wild

Nobody has done anything wrong of course, nothing to see here. Meanwhile there is no official statement as to who is the broker of Kaplan’s trades, but as the linked article highlights, the fact that he has a ‘sweep account’ for trade settlement with his previous employer Goldman Sachs is a pretty good clue and would (and should) have raised some serious questions about KYC in any case – whoever the broker is. KYC, a key aspect of which ought to be about whether the client putting on multiple $1m+ trades in S&P mini futures has any privileged information (which as a voting member of the Federal Reserve he almost certainly did on occasion, which is why it is more ‘normal to put savings into a blind trust or equivalent) rather than simply knowing the fact that he was doubtless good for the money as a former Vice Chairman of Goldman Sachs!

This also raises once again the broader issue of the revolving door between giant US Corporations and the US Government – as we like to put it, while China has State Owned Enterprises (SOEs), the US has Enterprise Owned States – that extends the whole issue of Crony Capitalism beyond the vast lobbying operations of K Street to a different level. Goldmans, or “Government Sachs” as it has become known, has been particularly active in the Private to Public trade since its flotation back in 1999 made many of its partners (Including Kaplan) centi-millionaires, probably very much helped by the fact that in ‘volunteering’ to work for the government they were allowed/required to sell all their Goldman stock to avoid conflicts of interest and, like Hank Paulson, many were able to do so without having to pay any tax on capital gains.

In the navel gazing world of Fixed Income traders, the fact that the two Governors are regarded as ‘Hawkish’ will likely trigger some of the usual Kremlinology over their replacements and we may see some attempts by noise traders to exploit this – although the fact that recent deleveraging/derisking has pushed the trade weighted dollar to the top of its recent trading range will be a more important factor. Likely the traders will wait for a technical move, either a breakout or a reversal, before bringing this ‘new fact’ into play. (Just to be clear, in Bond market terms Hawkish means more restrictive monetary policy, whereas in the upside down world of UK Covid 19 politics, Hawkish members of the cabinet are portrayed as those wanting less restrictive lockdown policy.)

The Chart shows the trade weighted index of the US Dollar, which has bounced recently, likely due to de-risking (paying back dollar leverage) and is aiming to complete a 50% reversal of its drop from summer 2020. While the index is closely watched, it is not really traded as such, rather it represents a weighted basket of Yen, Euro and Sterling.

Source, Bloomberg, Market Thinking

Thus any breakout will be probably be ‘explained’ by speculation that the Fed will be more Hawkish, while a mean reversal will be explained by the the reverse. Meanwhile, the noise traders will likely miss the bigger picture, the political consequences of this latest example of the inner circle looking out for itself and something of an echo of an Insider Trading Scandal last year when a number of Senators were accused of using insider information. (although it went nowhere).

Elizabeth Warren has already said that she will not vote for Jerome Powell’s renomination – which ought to unsettle markets and, as we discussed following the end of President Trump, Populism has not gone away and in the lead up to the Mid Terms this is exactly the sort of story to fuel it.

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