Friday Thoughts
Warsh-ed / Capitulation nearing ? / Macro Reflections
It is hard not to start with a reflection on the July FOMC. I have honestly never seen a worse performance by any central banker. And yes, this includes Lagarde, who I think has no right to be heading the ECB. It’s not the decision itself that was ultimately cast, but the way Warsh answered questions. It was all fluff, big on management-style words that lack any substance and, most importantly, give no reasonable framework for their thinking and inner workings. He sounded as if free markets were invented only a few weeks ago.
Let’s look at some examples.
To be fair to the press room, they asked questions anyone of us would have wanted answers for. Why didn't you hike? What would make you hike next time? Does today's decision mean September is more or less likely?
Warsh wasn't having any of it. In fact, when asked why the Fed had decided to "hold" rates, he immediately pushed back: "I wouldn't frame it as a hold." That wasn't semantics. It was philosophy. Throughout the press conference, he kept returning to the same broad ideas: "Policy is not on a preset course," "We're looking at the totality of the incoming information," and "This Fed will not waver." Even when asked what would trigger higher rates, he refused to draw a line in the sand, saying only that "if inflation continues to be elevated through the forecast period, interest rates could well be part of that solution, but I wouldn't say it's in isolation."
Ladies and Gentlemen, we have all been Warsh-ed.
Warshed (adjective) /wɔːrʃt/
Warshed: Having sought clear guidance from a central banker only to receive an answer that is philosophically coherent, technically accurate, yet provides almost no actionable information about future policy.
Previous Fed Chairs often tried to help markets understand the reaction function. Warsh seems to be doing the opposite. He isn't trying to make the next meeting easier to price; he's trying to convince investors that every meeting starts from scratch. Whether you agree with that approach or not, it represents a meaningful shift in how the Fed communicates, and one that could ultimately prove just as important as the level of interest rates themselves.
Ultimately, no forward guidance is fine, but then you have to show policy credibility. He says he infers a lot from looking at markets. Even there, he was very vague. I’m sure that even he would have inferred from yesterday’s market reaction that his second presser didn’t go to plan.
Is it though? The steepening of the curve is possibly the right approach to tightening policy, as the sensitivity of the economy is tilted towards longer durations. Hiking rates, as some would argue, is not nearly powerful enough, especially with ample liquidity conditions and record deficits.
I have sympathies for this view, and maybe that’s the grand plan. But I’m not sure Bessent will approve such an approach, although it's linked to running the economy hot, which is already firing pretty solidly. QRA is coming up next week.
Inflation expectations (5y5y) leapt higher as well, although still a few bps from their highs. This is also being driven by Oil, which rallied hard yesterday, making it hard to filter out the policy inference.
Meanwhile, all eyes are on stocks, with tech further deflating and the SMH ETF now trading below the 100 moving average (chart doesn’t include the Thursday ramp). The KOSPI overlay would suggest more downside (again, I didn’t cater for the huge month-end rally here). We are at crucial support levels, however. For more detailed technical analysis, members are advised to look at the chart book and dashboard, which are updated daily over at pa-globalmacro.com.
Goldman’s prime book saw the largest tech liquidation since 2021 and the second largest on record, with memory stocks seeing their largest selling flow. Situational awareness, anyone? Remember that good opportunities come in capitulation events.
Dispersion and momentum unwinds are wreaking havoc in hedge fund strategies, where long-short funds and quants saw a tough month, although they are still up nicely on the year.
It seems as though the tech and momentum trades that people got overly exposed to are, so far, an isolated instance. The equal-weighted SPX, for example, has quietly printed a new high recently.
Let’s now read Macro D’s latest thoughts on the FOMC and BoE before we head into month-end and then prepare for a new month ahead. Oh, the BoJ has just seemingly intervened and sent the Yen soaring 3%. Best to burn cash in illiquid market conditions when the Dollar is turning. Stupidity is doing the same thing over and over again and expecting different results.
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Let’s now read and reflect some more. Have a wonderful weekend.
