The 10th Man

Shame

August 6, 2015

Shame is a powerful motivator. Especially in this business.

When I was an ETF trader, if a client came in to trade a few hundred thousand shares of an ETF and the price moved abruptly against him right after the trade was consummated, the client would request a price improvement. This was to prevent embarrassment when the client (an execution trader) reported the fill to his boss (the portfolio manager).

The embarrassment was so acute that if we refused to grant him an improvement, we might never hear from that client again.

This $5 Trillion Market Is Just Getting Started.

Don’t miss out on the ETF revolution. Get going with this must-read report from Jared Dillian.

It is generally true, though, that people who work in the capital markets do not embarrass easily. You win some, you lose some. You have to be willing to lose money in order to make money. Most people understand this. (If you ever find yourself in a trading job where your boss screams at you for losing tiny amounts of money, leave immediately.)

Government folks, well, that’s a different story. They fear embarrassment more than death itself.

Le Fed

I am thinking about the Fed in particular. I was about to say that the Fed doesn’t have a P&L, but they actually do have a P&L, it’s just that they don’t care about it. Nobody is going to get paid or promoted based on how much money the Fed returns to the Treasury. People will get paid or promoted based on how much heat the Fed takes from the press and the general public.

If nobody knows what the Fed does, even better. That’s why Ben Bernanke’s public outreach campaign, including the 60 Minutes piece, was so puzzling. But he pulled it off, as he pulled off most things as chairman.

As it stands, nobody knows what the Fed does, or who Janet Yellen is, except for the press pool, who are a bunch of drool buckets. The journalists are in the business of selling newspapers, so they try to create drama, as they do around this Fed hike.

Atlanta Fed President Dennis Lockhart was out Tuesday making the case for a rate hike, and the Wall Street Journal sent out an alert, which is a very big deal, but trust me, there is not going to be any rate hike.

“Dillian Is Dumb Because He Said There Would Be No Rate Hike and There Actually Was One”

And this is sort of the game that the newsletter writers play, too—many of them try not to say anything falsifiable, because God forbid someone could go back on the Internet and point to something where you were wrong. And if you are wrong, there is shame associated with that. So I am saying on the Internet that I do not think there’s going to be a rate hike, and I might be proven wrong.

I’m a trader at heart. You win some, you lose some.

There is one, maybe one and a half reasons why I think there will be no rate hike:

The Fed will always choose the path of least embarrassment.

If the Fed hikes rates too soon, they tank the economy, and we get a recession, and they are squarely to blame for it. The Fed incurs reputational damage. This is the worst thing possible.

If the Fed hikes rates too late, there is some possibility that we might get inflation very far in the future, and nobody will be able to pin it on them. Not as much embarrassment.

So the Fed will always err on the side of raising rates too late.

Except there is one problem. They have been yapping about raising rates for so long, that now it will be a little bit embarrassing if they don’t raise.

This $5 Trillion Market Is Just Getting Started.

Don’t miss out on the ETF revolution. Get going with The 5 ETF Trading Strategies You Should Know About Before Investing, from Jared Dillian.

But still not as embarrassing as the original scenario, where they inadvertently cause a recession. That would be a disaster (for them).

What About the Financial Crisis?

Didn’t the Fed act boldly during the financial crisis?

No. Another case of ass-covering by the Fed. Bernanke is no different. In a crisis of that magnitude, you cannot be seen as doing too little.

Bernanke had two choices: act cautiously or pull out all the stops. He correctly estimated that it was better to be seen doing too much rather than too little. Remember TAF and TALF and all that nonsense? He would have kept coming up with lending facility acronyms if he had to.

The Fed will always, always, always pursue the path of least embarrassment.

Come to think of it, any government anywhere will always pursue the path of least embarrassment.

Whoops, I just gave away one of my trading secrets. Now you are in possession of it.

There Is One Other Possibility

The Fed could do half a rate hike and just be done. You see, interest rates are not at zero right now—they vary between 10 and 15 basis points. The Fed could just do half a rate hike up to 25 basis points and call it quits.

Not even the dippy journalists think that we’re going to have a protracted rate hike cycle. So all this drama is about 10 basis points. How incredibly useless.

It might not be useless, though. Weird things happen with interest rates around the zero bound. I’m being serious. Even a small rate hike might cause more havoc than people think.

If the Fed does hike, and it does a poor job of communicating that rates are on hold indefinitely, the market will not react well.

But anyway, my call is they chicken out again. I’m not afraid of being wrong. I don’t embarrass easily.

Jared Dillian
Jared Dillian

 

Get Thought-Provoking Contrarian
Insights from Jared Dillian

Discuss This

0 comments

We welcome your comments. Please comply with our Community Rules.

Comments

cullenap@gmail.com

Aug. 6, 2015, 11:52 a.m.

I have been reading Jared’s articles over the last few months since they started appearing in my email inbox.

He is a smart dude. Funny. Insightful. Contrarian. Forthright (i was going to say honest, but he is a trader for a profession ! lol)

Jarad, from your body language in that photo one can see you are an intellectual boxer. And a heayweight one at that.

I bet you have nostalgia and contempt in equal measure for the day trading environment that you have left

neelyll@yahoo.com

Aug. 6, 2015, 10:52 a.m.

The Fed will always choose the path of least embarrassment.

To which I reply - Paul Volcker, late 70s - early 80s.
Not always…


Use of this content, the Mauldin Economics website, and related sites and applications is provided under the Mauldin Economics Terms & Conditions of Use.

Unauthorized Disclosure Prohibited

The information provided in this publication is private, privileged, and confidential information, licensed for your sole individual use as a subscriber. Mauldin Economics reserves all rights to the content of this publication and related materials. Forwarding, copying, disseminating, or distributing this report in whole or in part, including substantial quotation of any portion the publication or any release of specific investment recommendations, is strictly prohibited.
Participation in such activity is grounds for immediate termination of all subscriptions of registered subscribers deemed to be involved at Mauldin Economics’ sole discretion, may violate the copyright laws of the United States, and may subject the violator to legal prosecution. Mauldin Economics reserves the right to monitor the use of this publication without disclosure by any electronic means it deems necessary and may change those means without notice at any time. If you have received this publication and are not the intended subscriber, please contact service@mauldineconomics.com.

Disclaimers

The Mauldin Economics website, Thoughts from the Frontline, The Weekly Profit, The 10th Man, Connecting the Dots, Transformational Technology Digest, Over My Shoulder, Yield Shark, Transformational Technology Alert, Rational Bear, Street Freak, ETF 20/20, In the Money, and Mauldin Economics VIP are published by Mauldin Economics, LLC Information contained in such publications is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. The information contained in such publications is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. The opinions expressed in such publications are those of the publisher and are subject to change without notice. The information in such publications may become outdated and there is no obligation to update any such information. You are advised to discuss with your financial advisers your investment options and whether any investment is suitable for your specific needs prior to making any investments.
John Mauldin, Mauldin Economics, LLC and other entities in which he has an interest, employees, officers, family, and associates may from time to time have positions in the securities or commodities covered in these publications or web site. Corporate policies are in effect that attempt to avoid potential conflicts of interest and resolve conflicts of interest that do arise in a timely fashion.
Mauldin Economics, LLC reserves the right to cancel any subscription at any time, and if it does so it will promptly refund to the subscriber the amount of the subscription payment previously received relating to the remaining subscription period. Cancellation of a subscription may result from any unauthorized use or reproduction or rebroadcast of any Mauldin Economics publication or website, any infringement or misappropriation of Mauldin Economics, LLC’s proprietary rights, or any other reason determined in the sole discretion of Mauldin Economics, LLC.

Affiliate Notice

Mauldin Economics has affiliate agreements in place that may include fee sharing. If you have a website or newsletter and would like to be considered for inclusion in the Mauldin Economics affiliate program, please go to http://affiliates.ggcpublishing.com/. Likewise, from time to time Mauldin Economics may engage in affiliate programs offered by other companies, though corporate policy firmly dictates that such agreements will have no influence on any product or service recommendations, nor alter the pricing that would otherwise be available in absence of such an agreement. As always, it is important that you do your own due diligence before transacting any business with any firm, for any product or service.

© Copyright 2018 Mauldin Economics