Random Musings on Markets 2019: Oh Oh, It's Musings*

In this week’s honestly-it-still-isn’t-weekly roundup of odd, loosely finance-related tidbits, we bring you thoughts about a tête-à-tête that was short a tête, the Fed’s apparent rustiness in the repo market, a pirate-speak assessment of recent monetary policy developments, a look at two laudable people making headlines and a ... umm … peek at the Fed’s dot plot. We hope you enjoy the read!

About a Certain EU Leader’s Conversation With an Empty Lectern

Luxembourg Prime Minister (PM) Xavier Bettel made international news this week when he forged ahead with a press conference featuring UK PM Boris Johnson. This was news because, awkwardly, Johnson didn’t show.

It is normal for press conferences to follow a tête-à-tête between heads of state, but they usually happen indoors. That is where Johnson requested their press conference take place after he saw anti-Brexit protestors with sophisticated sound systems camped out a couple yards away from the outdoor stage. But Bettel wouldn’t bend, so Johnson bowed out. Proving no self-respecting politician turns down a chance at headlines and showmanship, Bettel proceeded to take the stage, rail against Brexit and take verbal swipes at Johnson’s empty lectern.

As political spectacle, this has zero relevance for markets—but it sure was funny! Headlines, naturally, concocted all manner of reasons for Bettel’s display. Some said he is really that passionate about the EU. Others pointed out that, with Luxembourg the primary beneficiary of EU tax regulations and home to many EU civil service jobs, Bettel has a vested interest in protecting the status quo. Many took pot shots at the apparent political opportunism and desire for the limelight.

Maybe there is a kernel of truth to all of those, but we can’t help but ask the obvious question: Is he maybe just a really big Clint Eastwood fan? After all, it was Eastwood who bizarrely delivered a speech to an empty chair on stage at the 2012 Republican National Convention. He looked at it and gestured at it, much as Bettel looked at and gestured at that poor, defenseless, silent lectern. Even better, Eastwood’s empty chair was supposed to represent then-President Barack Obama, much as Bettel’s empty lectern was a stand-in for Johnson. It wouldn’t surprise us if Bettel unleashed a menacing “Go ahead, make my day” before taking the stage.

Anyway, if any of you dear readers happen to be part of Luxembourg’s political press corps, please do us a favor and run our line of reasoning by Mr. Bettel at your earliest opportunity. Thanks in advance.

You Know the News Has Been Slow When …

… One esoteric corner of capital markets has some weird interest rate gyrations and headlines can’t get enough of it. So it was this week with a thing called the repo market, which is where banks borrow from each other for short periods using Treasury bonds as collateral. The interest rate on these loans, called the repo rate, spiked early this week, forcing the Fed to intervene.

If your first question is, “why is the Fed involved in the second-hand market for repossessed cars and furniture,” you are probably not alone, because this is really fringe stuff. For finance nerds only. If you are now nodding vigorously and lamenting how even the supposedly simplistic explainer-type articles about these events just made you more confused, you are probably not alone either. You are also fine. As industry analyst Dan Davies quipped on Twitter, repo weirdness “happens once every now and then, and the correct response is always to just point and go ‘hahaha nerrrrd’ and then go back to some proper work while the roughnecks in the repo mines sort it out.”^[i] We are big nerds who don’t like throwing stones in glass houses, so we won’t point and laugh, but yah. This is really inside baseball stuff.

If you want the nitty gritty on why corporate tax payments and a rather large supply of US Treasurys contributed to the cash shortage that drove the spiking rates, plenty of informative coverage abounds. Our primary goal is “Never Be Boring,” so we won’t go there here. We will simply point out that the Fed intervening in repo markets isn’t new. They just haven’t had to do it for a decade because, thanks to quantitative easing, there was a glut of excess reserves and the Fed was mopping up Treasury supply. But before QE, when reserves were low and dinosaurs were roaming the Earth, the Fed would regularly inject short-term funds and buy Treasurys to keep the repo rate in line with its overnight interest rate target. We guess the need to resume doing so now that excess reserves shrank a bit somewhat snuck up on them, and then it took them a couple days to shake the rust off and learn how to do their old job again. We can sympathize with that. If our old employers asked us to temporarily man the bar or cash register again, we would probably mess up a few times.

Anyway, this whole saga raised what we think is a question for the ages: Considering the New York Fed carried out these interventions, can we all now call New York Fed President John Williams the Repo Man? Please?

Central Bank Pirates

In honor of Talk Like a Pirate Day, which was on Thursday, we present a brief synopsis of this week’s central banking news that we have run through the Online Pirate Translator.

Th' Bank o' England 'n Bank o' Japan kept interest rates steady, 'n neither added more quantitative easin'. Th' Fed cut its benchmark rate by 25 basis points 'n reduced its interest rate on excess reserves t' 1.8%. Lastly, th' European Central Bank announced banks mostly skipped its latest TLTRO offerin', rejectin' its program t' provide cheap fundin' fer banks that promise t' lend it out. Ye might say they told th' bank t' walk th' plank.

Arrrrrrrrrrrrrrrr!

We Have a New Hero

Her name is Doreen Jones, she is 81 years old, and she is awesome. In May, she was at an ATM in England, trying to withdraw some cash, when a woman tapped her and tried to steal her bank card. The Telegraph tells us what happened next, quoting Jones’ statements on a BBC program:

“I thought, ‘no, you’re not having my money, I worked hard for that’. I grabbed my card first, put it in my hand, then grabbed her quick. I got her hair as well as her collar and she started screaming - I don’t know why she was screaming, it was me who should have been screaming and crying. Once I let go of her, she ran off straight away round the corner.” She added: “She wasn’t expecting me, I tell you - she was expecting someone more vulnerable.”

If you follow the preceding hyperlink, you will also find the CCTV footage of the incident.

Ms. Jones, we hope we are as strong and feisty as you when we reach our 80s!

We Have Another New Hero

Last weekend, in what we are surprised hasn’t been labeled a triumph proving the power of marrying FinTech^[ii] and social media, one Iowa State student shattered fundraising expectations. While this story has a heartwarming ending, we feel compelled to note that not every similar story ends well.

Before we get all Debbie Downer, here is what happened. Saturday, the University of Iowa and Iowa State University squared off in their annual football game. ESPN’s nationally televised pregame show was in town to kick things off. Fans often hold up signs in the broadcast’s background, and Carson King—a former Iowa State student—was no exception. But rather than a game-related sign, his read, “Busch Light Supply Needs Replenished,” along with his electronic address on Venmo, an online money transfer app.

Now, Mr. King mostly did this as a joke, thinking he may get a few bucks through this at most. Our research^[iii] uncovered the fact that a 30-pack of Busch Light runs right about $17, so maybe he would be able to afford one or two. But within a short period of time, King discovered he had received enough for over 1,000 cans of Busch Light, which we figure literally no one needs. King seems to have reached the same conclusion and nobly elected to donate the funds to a local children’s hospital. When Busch Light heard of this, they offered to match any donation received. So did Venmo. Before long, King’s handmade joke of a sign had raised $40,000, which he plans to soon donate. That is the power of humor.

Now that is all great and we are sincerely happy for how it turned out. Mr. King seems like a genuinely good person. We bet a lot of young people in similar situations wouldn’t think of the children. However, we would like to note that similar marriages of FinTech and social media aren’t always such positives. Some turn out to be fraudulent. In our view, if you plan to give to a charity, you are best off finding established ones with strong histories of using most of the funds for the intended benefit.

Fed Cuts Rates, Disagrees and Draws Dots

Unless you were backpacking in remote Nunavut this week, you probably know the Fed cut the fed-funds target range by 0.25 percentage point. Pundits spilled hundreds of pixels on whether or not this was the right move or enough or motivated by President Trump’s pressure or what have you. That is all typical. (If you would like our view on this, please consult Fisher Investments Founder and Executive Chairman Ken Fisher’s USA Today column published days prior to the move.)

But another aspect of the Fed’s move also caught lots of eyeballs: Three voting members of the rate-setting Federal Open Market Committee voted against the cut—the most in Powell’s tenure. One thought rates should be cut more. Two others voted for no change. This was allegedly noteworthy, although we aren’t sure why. Isn’t the point of having a panel debate to determine appropriate policy that sometimes views will differ?

Anyway, coverage of the dissent extended into the Fed’s projection of rates at yearend—the so-called dot plot. As Yahoo! Finance put it, “The rift is also seen in the dot plot projections released Wednesday, mapping out policymakers’ forecasts for where rates would be by the end of the year. Seven of the 17 participants on the committee saw another 25 basis point cut by the new year, but five participants feel the appropriate level by year-end would in the range of 2% to 2.25% (the level prior to Wednesday’s cut).”

We have long argued these projections aren’t worth the paper they are printed on. September 2017’s dot plot showed members expected fed-funds to finish this year anywhere from 1.1% to 3.4%—a wide range. Ten of sixteen projections had rates at 2.6% or higher, putting the median at 2.9%. At this meeting last year, the dot plot put yearend 2019 rates between 2.9% and 3.4%, for a median 3.1%. With only three months to go, fed-funds was just cut to 1.75% – 2.00%.

Now, disclosure: We don’t expect these forecasts to prove accurate. They are merely a statement of what officials’ interpretation of future policy hints at based on data available at the time. For all the talk of “forward guidance,” there really isn’t anything “forward” they “guide” you to. We would suggest these projections are perhaps best for comic relief or playing connect the dots. (As Exhibit 1 shows, this month’s 2022 and longer run plots look a lot like a dreidel and a Christmas tree in sequence, leading us to believe the FOMC is already in the holiday spirit—and it isn’t even Halloween!) Or you can use them as your own Rorschach test, and see if you also make out “a bird, a cow and a horse with a hat on.”^[iv]

Exhibit 1: Fun With the Dot Plot

Source: Federal Reserve, printer, Uniball pen and authors’ imagination, as of 9/19/2019.

*Sadly, for the second week in a row, our title must double as an obituary—this time for The Cars’ front man and new wave legend Ric Ocasek, who passed away Sunday. RIP Ric. The Cars were always just what we needed.